House Bill Lowers Employer ‘Play-or-Pay’ Affordability Percentage
The Affordable Care Act (ACA)’s employer shared-responsibility (‘play-or-pay’) benchmark for determining the affordability of employer-sponsored health care coverage would significantly and permanently drop to 8.5% (from the current 9.83% in 2021) of employee household income (or an applicable affordability safe-harbor) under legislation approved this week by the House Ways and Means Committee.
The bill as drafted would make the new affordability threshold effective in 2022 and beyond (i.e., not indexed). As a reminder, this affordability percentage can affect individuals’ eligibility for federally subsidized ACA marketplace coverage, as well as employers’ potential liability for play-or-pay assessments.
The bill would also make permanent the American Rescue Plan’s (ARPA’s) two-year (2021 and 2022) expansion and increase of subsidies for ACA marketplace coverage. Specifically, marketplace coverage would continue to be fully subsidized for individuals earning up to 150% of the federal poverty level (FPL), and subsidies would continue to be available for individuals earning more than 400% of the FPL. In addition, those subsidies would be temporarily available (at least through 2024) even to low-income individuals (and their family members) whose household income does not exceed 138% of the FPL, regardless of whether their employer offers affordable, minimum value coverage. Employer play-or-pay assessments for this newly group subsidy-eligible individuals would not apply.
Additional provisions in the Ways and Means bill would:
Make ARPA’s increased dependent care tax credit permanent. The bill would make permanent ARPA’s one-year dependent care tax credit expansion, which made the credit fully refundable and increased the maximum credit percentage to 50% (from 35%). The amount of expenses eligible for the credit would stay at the increased amounts of $8,000 (from $3,000) for one qualifying individual and $16,000 (from $6,000) for two or more qualifying individuals (so the maximum credits would be $4,000 and $8,000). These dollar amounts would be annually adjusted for inflation beginning in 2022. The credit would phase down from 50% to 20% for individuals with adjusted gross income (AGI) between $125,000 and $183,000 (both indexed), and would completely phase out for individuals with AGI in excess of $438,000 (not indexed). If these dependent care tax credit changes are made permanent, many more individuals will continue to find that the credit will provide greater tax savings and benefits than contributing to a dependent care flexible spending arrangement (FSA), even one that’s enhanced as described below.
Make ARPA’s increased employer-provided dependent care assistance permanent. The bill makes permanent ARPA’s increase in the income exclusion for employer-provided dependent care assistance programs (DCAPs) – for example, employee pre-tax contributions to dependent care FSAs – from $5,000 to $10,500 (and from $2,500 to $5,250 for a married individual filing a separate return), indexed for inflation beginning in 2022. But because the bill does not amend the DCAP nondiscrimination rules, these increased amounts likely would be unavailable to many highly-compensated employees.
Reinstate and expand bicycle-commuting benefits. The bill restores and increases an employee income tax exclusion of up to $84 (from $20) per month (this is our projected amount for 2022; indexed thereafter) and preserves employers’ deduction for qualified bicycle commuting benefits. A new tax credit for electric bicycles would also be available.
This and other health care and paid leave care proposals are part of House Democrats’ drive to pass a $3.5 trillion budget package that embraces much of President Biden’s policy agenda. Democrats hope to advance the legislation under special budget reconciliation rules which allow passage in the Senate with a simple majority (as opposed to needing a filibuster-proof 60 vote) and thus would not need any Republican support, but Democrats have no votes to spare in the Senate. Furthermore, even if the Senate passes the bill, Democrats only have a few votes to spare in the House. The Senate won’t begin work in earnest on its leg of the process until the House passes its package – perhaps by the end of this month – so the Ways and Means provisions are subject to change and the Senate will push for a number of its own health care proposals.