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1/ Here’s a thread providing more detail on the tax risks created by the 2020 effective date for individual coverage HRAs. I’ll have more to say about this later, but I want to get this info out there as stakeholders start digesting the new rules.
2/ Our piece notes risks to employees bc the Marketplaces won’t be ready this fall to determine APTC eligibility for those offered HRAs. Here’s the letter from SBMs making clear they can’t be ready and warning of “harmful tax implications” for consumers.
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nashp.org/wp-content/upl…
3/ The preamble to the final rule makes pretty clear that the FFM also won’t be ready to determine APTC eligibility.
4/ The 1st and most obvious risk from this is that people granted APTC in error will have to pay some or all of it back at tax filing – the tax bills could be thousands of dollars.
But there are other risks to be aware of as well.
But there are other risks to be aware of as well.
5/ 2nd, if an employee receives a subsidy in error, the IRS may attempt to assess an employer mandate penalty against the employer. The employer would not actually owe a penalty, but the onus would be on them to show that, and they may not realize it and pay anyway.
6/ 3rd, employees may make the opposite mistake: believing that the HRA makes them ineligible for APTC, when in fact the HRA is “unaffordable.” In that case, the employee may miss out on the better deal, since the subsidy is graduated by income but the affordability test isn’t.
7/ Next, there is an additional set of risks that stem from a technical rule about where HRA recipients must purchase coverage.
8/ Workers offered HRAs will generally need to buy coverage off-Mktplace to have their full premium excluded from income. But they may not understand this, especially since they'll be told to first visit the Mktplace, which won’t be ready to clearly convey the rules.
9/ So, 4th: If workers mistakenly purchase Mktplace coverage, some of their premium will be subject to income and payroll taxes, creating unexpected tax liability for worker and employer. Once the error is discovered, it will generally be too late to switch off-Mktplace that year
10/ 5th, if the employer does not discover the error and reimburses the employee for the Marketplace coverage, there is a risk of more severe consequences, like plan disqualification.
11/ 6th, depending on how an HRA is set up, employees that mistakenly enroll in Marketplace coverage may forfeit their HRA and receive no help purchasing coverage.
12/ So that’s 6 separate risks of negative tax or other financial consequences for employees and employers. Each of these risks will exist to one extent or another even when the Mktplaces are ready. Each is made worse by the Mktplaces providing inaccurate or incomplete info.
13/ The Depts take some steps to mitigate these risks, particularly those related to APTC. They beef up the model notice for employees, though at 5+ pgs employees may not digest it. And they promise tools to help workers determine their APTC eligibility on their own.
14/ These measures are probably positive, but many employees will likely fail to see or understand these tools and will follow the familiar – but now inaccurate – enrollment path at the Marketplace.
15/ And the model notice doesn’t address the risks related to mistakenly purchasing Marketplace coverage: it tells HRA recipients to go to the Marketplace but includes no mention that they may need to purchase coverage off-Marketplace.
16/ In short, the mitigations seem insufficient to address the risks.
17/ What does this mean for stakeholder reactions? Views about the HRA rule in general can vary, though we think on balance it will do more harm than good. But for 2020, the picture is clearer.
18/ The federal government has promulgated a rule with an effective date that the federal government is not ready to meet. Taxpayers should not be left holding the bag.
19/ Employers, brokers, benefits advisors, and state regulators should be very wary about the new individual coverage HRAs for 2020. / END
