The Affordable Care Act (ACA) endeavors to help millions of Americans obtain medical insurance. Some supporters are compelled by compassion, others by business interest, but the idea of helping more people get insured is now widely supported. However, federal regulations have introduced what appears to be a significant disconnect between the intent to cover everyone and the employment regulations that will determine whether lower wage workers can actually afford coverage.

Low wage families will be looking for the most affordable coverage options for the entire family. If income is low enough, the entire family may be eligible for Medicaid in some states. Under Medicaid, the family may have no monthly premium cost, and out-of-pocket costs would be nominal. However, if the family is above the Medicaid and/or Children’s Health Insurance Program (CHIP) eligibility thresholds, private coverage may be the only option. So will anyone subsidize private coverage for families that are above Medicaid/CHIP income thresholds?

Either the employer or the government may help. Federal law encourages the employer to take the lead in premium support, but the law doesn’t require it. If the employer doesn’t offer some kind of coverage and employer contribution, an excise tax (employer penalty) may be applied except with the small employers (less than 50 full-time equivalent employees) as they are exempt. As a fallback, the government is offering advanced premium tax credits (APTC) to the worker and/or family members who cannot access “affordable” coverage at work. But what is “affordable,” and how does the affordability standard apply to a family?

As a fallback, the government is offering advanced premium tax credits (APTC) to the worker and/or family members who cannot access “affordable” coverage at work. But what is “affordable,” and how does the affordability standard apply to a family?

Group coverage is deemed affordable (for purposes of eligibility for the APTC) if the “single only” coverage is available to a worker at a cost less than 9.5% of the employee’s household income. Employers must offer coverage to dependents (recently defined as children, not a spouse) to avoid employer penalties, but the employer is not required or expected to pay for dependent coverage. As a result, many low wage workers will end up in a situation where the employer pays toward employee-only group coverage, while offering dependent coverage on the worker’s dime. Because dependent coverage (which is deemed affordable even though it may not be) is available to the worker’s family through the group plan, the family members are not eligible for APTC help from the government if applying for coverage in the public exchange. At the end of the day, many workers will be unable to afford the cost of family coverage at work and will leave their dependents uninsured.

An unintended consequence may arise in the labor market. If the large employer does not pay a substantial portion (in my opinion, at least a majority) of the family coverage for low wage workers, the employee will eventually figure out that the only way to get financial assistance to cover their dependent children will be to find work with an employer that does not offer “affordable” coverage. This will probably lead to an incentive for low wage employers to either drop group coverage, or “engineer” the employee-only cost of the group plan to be more that 9.5% of W-2 wages for low wage workers.

In either case, the large employer will pay a penalty, and the employee may remain eligible for APTC financial assistance in the public exchange for himself and any dependents.

Engineering the single-only cost of the group plan to something exceeding 9.5% of W-2 wages may end up making the most sense for the employer. The corporation is able to indirectly leverage the APTC to make sure family members are covered since employees could waive group coverage and take the government subsidies instead. The employer’s excise tax (employer penalty) won’t deter this strategy as the penalty will be comparable to what the employer would have spent on single-only coverage.

The downside will be the challenges that employer may have with participation requirements on the group plan, which may be imposed either by the carrier based on market rules (for fully insured plans), or by Treasury guidance. IRC 105(h) imposes certain discrimination rules on group health plans in order for those plans to remain tax advantaged, and part of the forthcoming rules from the Treasury may include certain group participation thresholds. If participation requirements for group plans prevent the “engineered” strategy of pushing lower wage people away from the group plan and into the public exchange, many low wage employers may drop their group plans out of necessity in order to recruit labor.

We’d love to hear your thoughts on the matter. Please comment.