The enactment of the Inflation Reduction Act of 2022 (IRA) on August 16, 2022 resulted in sweeping changes to many climate, energy and healthcare provisions, including extending enhanced Affordable Care Act (ACA) subsidies through 2025.

Background

IRC Section 4980H, which was added by the ACA, imposes excise taxes (commonly known as the employer mandate penalty) on applicable large employers (ALEs) if their employees receive premium tax credits for purchasing their own health care coverage from one of the health care marketplace exchanges.

Premium tax credits generally are available to individuals if they do not have affordable coverage from their employer and their household income does not exceed 400% of the federal poverty limit. The excise tax is the "employer shared responsibility payment" (ESRP) for financing the health coverage of employees at income levels eligible for premium tax credits. The American Rescue Plan Act (ARPA) expanded the eligibility for premium tax credits to all income levels and provided that medical premiums for marketplace benchmark plans are capped at 8.5% of household income. This provision was supposed to expire at the end of the 2022 plan year.

The IRA extends the enhanced ACA subsidies established in the ARPA for three years — through 2025.

Implications

If an employer's lowest-cost plan premiums are not affordable, the employer may be liable for ESRP when full-time employees enroll in marketplace coverage and qualify for premium tax credits. With the expanded access and greater subsidies, more employees may enroll in marketplace coverage. Additionally, the expanded coverage, coupled with the "Family Glitch" provisions proposed to take effect in 2023, may make healthcare insurance available from the marketplace more attractive to employee dependents than coverage provided by employers (see Tax Alert 2022-0582). As a reminder, employers are not subject to ESRP if a dependent of an employee receives a premium tax credit.

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