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Temporary Premium Tax Credit Changes Could Increase Risk of ESR Penalties Through 2025

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  • Last Updated: 08/15/2022

Una mujer de negocios busca datos en la computadora para empleados que podrían haber tomado el crédito fiscal para primas.
The Inflation Reduction Act will extend the enhanced premium tax credit under the American rescue Plan Act (ARPA) through 2025. ARPA originally expanded the 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.

Table of Contents

With the passage of the Inflation Reduction Act by both chambers of Congress in mid-August 2022 and its expected signing by President Biden, the enhancements to the Premium Tax Credit (PTC) will be extended through 2025. 

The temporary PTC enhancements originally were extended in March 2021 by the American Rescue Plan Act. This refundable credit helps eligible families and individuals cover the cost of premiums on health insurance purchased in the health insurance marketplace.  

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.  

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 Through 2025

The stimulus package (ARPA) made 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. 
  • From 2021 through and 2025, the 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 Through 2025?

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.

Item 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.

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.

This article was previously updated March 25, 2021.

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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* Este contenido es solo para fines educativos, no tiene por objeto proporcionar asesoría jurídica específica y no debe utilizarse en sustitución de la asesoría jurídica de un abogado u otro profesional calificado. Es posible que la información no refleje los cambios más recientes en la legislación, la cual podrá modificarse sin previo aviso y no se garantiza que esté completa, correcta o actualizada.

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