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Employer Sponsored Health Coverage Explained

Updated for Tax Year 2019


OVERVIEW

The Affordable Care Act, also known as Obamacare, is simpler than some people may give it credit for. The basic rule to remember is that everyone must carry Minimum Essential Coverage (MEC). Employers with 50 full-time employees or more are obligated to sponsor plans for their workers to help them meet this requirement.


What is employer-sponsored coverage?

Doctor shaking the hand of a patient

The first step in understanding employer-sponsored health coverage is figuring out whether you have it. Technically, a health plan can be offered by your employer, available within your state or sponsored by the government.

If you purchase insurance privately or through the Health Insurance Marketplace, this isn’t employer-sponsored coverage. But if you’re covered by a health plan provided through your job, it’s most likely employer-sponsored. Check with human resources or your boss to be sure.

Premiums must be affordable

“The new health care law says that your contributions to a health plan sponsored by your employer must be affordable for you,” says Chip Capelli, an accountant with offices in Philadelphia and Provincetown, Massachusetts. Your definition of affordable might be different from your employer’s so the law includes specific guidelines:

  • Premiums can’t exceed 9.5% of your household’s income after taking your employer’s contributions into the equation.
  • Technically, this means that if both you and your spouse work, the 9.5% applies to your combined incomes.

But as a practical matter, many employers just go by the income reported on your W-2, because they have no way of identifying exactly what your household’s income might be.

What does affordable coverage mean to you?

If your share of the health insurance premiums through your employer is more than 9.5% of your income, you can get health insurance through the Health Insurance Marketplace, the website where you can get coverage when a more affordable plan isn’t available to you. When this is the case, you are likely eligible for the Premium Tax Credit to help pay the cost.

But if your employer offers health insurance that is equal to or less than 9.5% of your income, you can’t claim the premium tax credit if you buy through the Marketplace instead, a choice you might make if purchasing a policy there would be less expensive or offers better coverage than your employer-sponsored options.

There’s a family affordability glitch

Some taxpayers fall into what’s being called a “family affordability glitch.” The affordability rule applies only to coverage for you, not for your dependents. So when you add on coverage for your entire family, the premiums may exceed 9.5% of your income.

If you decline employer-sponsored coverage, you’ll still be barred from taking advantage of the Premium Tax Credit if you buy in the Marketplace instead, no matter what your reasons.

Non-complying Applicable Large Employers (ALEs) may pay fines

It’s likely in your employer’s best financial interests to offer you coverage you can afford. “The government encourages employers to offer affordable health care coverage by imposing some stiff monetary fines when they don’t,” says Capelli.

For 2019, if even one of a company’s workers receives a premium tax credit through the Marketplace because the company’s health insurance plans don’t meet the law’s standard for affordability, the employer must pay an annualized penalty equal to $3,750 multiplied by the number of employees who receive the premium tax credit.

  • If 10 of them receive a premium tax credit, this amounts to a $37,500 fine (10 x 3,750)

But this isn’t as steep as the fine a company faces if it employs more than 50 workers and offers no employer-sponsored health coverage at all.

  • The fine is $2,500 per employee, less 30 employees.
  • For example, if the company employees 75 full-time workers, the fine would be:
    o 75 – 30 = 45 employees
    o 45 x $2,500 = $112,500 fine

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