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Temporary Premium Tax Credit Changes Could Increase Risk of ESR Penalties in 2021 and 2022

The American Rescue Plan Act expands eligibility for the premium tax credit in 2021 and 2022, but this temporary change creates the potential for greater risk of financial penalties for Applicable Large Employers under the Affordable Care Act.
A business woman looks for data on computer for employees who might have taken premium tax credit.

One of the provisions of the American Rescue Plan Act, signed in to law March 11, 2021, included temporary changes to the premium tax credit (PTC). This refundable credit helps eligible families and individuals cover the cost of premiums on health insurance purchased in the health insurance marketplace. In addition, the Biden Administration recently expanded the special enrollment period in the Federal Marketplace to Aug. 15, 2021. 

The intent is to make health insurance purchased in the marketplace more accessible and affordable, thus potentially decreasing the number of uninsured Americans during the COVID-19 pandemic.  

The new law expands eligibility by removing the upper income limit and makes the PTC more generous for eligible individuals in 2021 and 2022.

However, for Applicable Large Employers (ALEs) who are subject to the Affordable Care Act’s Employer Shared Responsibility (ESR) provision, the temporary PTC changes introduce a potentially greater risk of penalties.

Temporary Premium Tax Credit Changes in 2021 and 2022

The new stimulus package makes changes that impact multiple tax years.

  • For 2020, the American Rescue Plan provides that taxpayers receiving excess advanced premium tax credits would not have to later reconcile the amount on their income taxes. 
  • For 2021, the law provides that individuals who received or have been approved to receive unemployment compensation for a week or more are eligible during the taxable year for PTC as if household income is 133% above the federal poverty level (FPL), essentially making the employee contribution for premiums zero for the second-lowest cost silver plan in the marketplace. 
  • For 2021 and 2022, the new law:
    • Removes the 400% above the FPL limit for PTC eligibility
    • Increases the amount of PTC for eligible individuals on a sliding scale based on the percentage household income above the FPL (see table below)
      • Changes the percentage of household income range from 2% to 9.83% (2021) to 0% to 8.5%
      • Suspends the annual inflation adjustment for the two-year period
      • These changes do not impact the rate to determine affordability of employer-sponsored coverage.

Income Contribution Percentage for Premium Tax Credits in 2021

Household Income (% of Federal Poverty Level) Affordable Care Act American Rescue Plan 
100% to less than 133% 2.07% 0%
133% to less than150% 3.10% to 4.14% 0%
150% to less than 200% 4.14% to 6.52% 0% to 2%
200% to less than 250% 6.52% to 8.33% 2% to 4%
250% to less than 300% 8.33% to 9.83% 4% to 6%
300% to less than 400% 9.83% 6% to 8.5%
400% and higher 8.5%

Source:  Congressional Budget Office, February 7, 2021

How Does Risk of ESR Penalty Increase in 2021 and 2022?

By making higher earners (with a household income of more than 400% of FPL) newly eligible for a PTC and providing currently eligible individuals with a more generous PTC, purchasing health insurance in the marketplace may become financially feasible for some individuals who previously found it too expensive.

For ALEs — generally employers with at least 50 or more full-time employees, including full-time equivalents, during the prior calendar year — this means potentially greater risk of an ESR penalty under the new law, as full-time employees who are not offered health insurance or who were not offered adequate and affordable coverage may decide to purchase health insurance in the marketplace. A full-time employee who is not offered affordable and adequate coverage and who receives a PTC triggers an ESR penalty.

Keep in mind, the calculation for a PTC is the premium (for the second-lowest cost silver plan based on age and geography) minus the applicable income contribution percentage multiplied by household income. So, the individual pays the applicable percentage of his/her household income (see table below). An individual can purchase coverage other than the second-lowest cost silver plan, but the PTC would be the same. 

Let’s illustrate with an example: Business Z is an ALE that offers minimum essential coverage (MEC) to at least 95% of its full-time employees and their dependents. Business Z has a few remote employees, including Max, who are not offered health insurance coverage. Max is 28, single (one-person household), a resident of Washington, D.C. and has an annual salary of $25,760. The 2021 FPL for a one-person household is $12,880. The 2021 annual premium for a second-lowest cost silver plan for a 28-year-old through the Washington, D.C. Exchange is $3,750 annually.

  Affordable Care Act American Rescue Plan Act
Percent of Household Income over Federal Poverty Level

25,760/$12,880 * 100 = 200%

Percent of Household Income Contribution for PTC 6.52% 2%
Max’s Annual Contribution 0.0652 * $25,760 = $1,680 0.02 * $25,760 = $515
Premium Tax Credit $3,750 – $1,680 = $2,070 $3,750 – $515 = $3,235

With an annual premium contribution of $1,680 in the individual market, Max found the cost too expensive and went without health insurance coverage. With the percent of income contribution dropping from 6.52% to 2% under the American Rescue Plan for two years, Max found it affordable to pay $515 annually.

Business Z is at risk of being assessed a penalty because it did not offer affordable and adequate health insurance coverage to Max, and Max went to the marketplace to purchase insurance and received a premium tax credit.

Is There Less Risk of ESR Penalty with Full COBRA Subsidy If Employee’s Hours Are Reduced?

The American Rescue Plan Act provides for a 100% COBRA subsidy through Sept. 30, 2021. As has happened during the pandemic, when an employer reduces an employee’s hours, the employee may no longer meet a health plan’s eligibility requirements. For an ALE, this situation can lead to as ESR penalty if the employee who is now part-time is still considered full-time based on a look-back period. The ALE must still offer the employee affordable and adequate health insurance coverage or risk being assessed a penalty if the employee receives a PTC. 

Without the full subsidy, an offer of COBRA coverage generally will not be affordable for ESR purposes as employees pay the entire premium. With the full COBRA subsidy, an ALE’s offer of COBRA meets the ESR affordability requirement, as the employee doesn’t contribute toward the premium. 

However, the subsidy expires at the end of September. An employee continuing with COBRA coverage would pay the full cost of the premium. After the COBRA subsidy expires, it is unknown if the employee would be able to move to marketplace coverage and receive a PTC, putting the ALE at risk of being assessed a penalty.

What’s the Impact for Employers?

The PTC and ESR provisions are intertwined. The American Rescue Plan’s temporary changes to the PTC that make it more generous and expand income eligibility directly correlates to potentially greater risk of ESR penalties for ALEs.

More employees, including full-time employees, may seek health insurance coverage in the marketplace and take advantage of lower out-of-pocket premium costs with a PTC. Employers should assess which individuals might put themselves at risk of an assessment and determine if they will choose to mitigate the risk in the coverage offered. ALEs should ensure that they file accurate and complete Forms 1094-C and 1095-C with the IRS to avoid being incorrectly sent a proposed assessment notice.

Paychex Can Help

Paychex understands the layers of complexity created by the COVID-19 pandemic and the subsequent legislation being passed to address it. If you want your focus to remain solely on your business and getting your employees back to work, know that we can help. We have the expertise with ESR to help assist with filing the necessary forms on deadline, the know-how to evaluate your penalty risk for coverage offers under ESR provisions, and much more.

Megha Godambe headshot
Megha Godambe is a Compliance Analyst with extensive experience in the policymaking arena. Her focus is Health Care Reform, including the Affordable Care Act, with a concentration on the Employer Shared Responsibility provision.
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* This content is for educational purposes only, is not intended to provide specific legal advice, and should not be used as a substitute for the legal advice of a qualified attorney or other professional. The information may not reflect the most current legal developments, may be changed without notice and is not guaranteed to be complete, correct, or up-to-date.

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