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Small Business Employee Benefits and HR Blog

How Employees Can Get Free Health Insurance Subsidies

The best kept secret of the Affordable Care Act (aka Health Reform or ObamaCare) is the availability of the individual health insurance subsidies which will be available to the majority of employees starting January 1, 2014.

tax subsidiesAs an employer, you may be wondering how employees can access the health insurance subsidies, and how to design employee health benefits that allows employees to access the subsidies.

The solution -- offer health insurance coverage through defined contribution instead of a traditional group health plan. With this arrangement, both your company and employees can save money for the same or better health insurance coverage.

Here are 4 key things to understand about the individual health insurance subsidies.

#1) How the subsidies work

Starting in 2014, the federal government is providing discounts for health insurance to eligible employees. The discounts, called “health insurance tax subsidies,” will help your employees buy affordable individual or family health insurance coverage through the new state health insurance marketplaces.The discounts will only be available when employees purchase health insurance through your state’s health insurance marketplace.

Each state will have a website where employees can view and compare policies, enroll in a plan, and receive the discount. Look up your state marketplace here.

#2) Which employees are eligible

If employees meet certain income requirements, and do not have access to affordable health insurance through an employer or another government program, then they are most likely eligible for a subsidy. Eligibility is based on a standard called the "federal poverty level" (FPL).

The subsidy will cap the cost of health insurance between 2% and 9.5% of annual income, depending on the employee's household income.Individuals and families who earn up to 400 percent of FPL may be eligible. This translates to an individual earning up to $45,960 in 2013 and a family of four earning up to $94,200 in 2013.

#3) How much the subsidies will help

The subsidies will cap the cost of employee's health insurance at 2% - 9.5% of their household income, if household income is up to 400% above the federal poverty line (FPL). Here's an example of maximum discounted premium amounts, by family size:tax subsidy chartFor detailed tax subsidy and premium amount charts see: Health Insurance Tax Subsidy Charts.

#4) Offer health benefits via a defined contribution health plan

With a defined contribution health plan, your company would:
  • Not offer a group health insurance plan (which would disqualify employees from the subsidies).

  • Offer a defined contribution health plan. With a defined contribution health plan:

    • Your company gives employees a tax-free healthcare allowance they can use on health insurance (via a Healthcare Reimbursement Plan or HRP).

    • Employees can enroll in health insurance through your state’s marketplace, and receive a discount via a health insurance subsidy (if eligible). Employees can also purchase health insurance from any broker or online.

    • Your company reimburses employees tax-free for their eligible health insurance premiums (up to the amount of their defined contribution allowance).

With traditional group health insurance costs rising every year, combining "pure" defined contribution with the individual health insurance subsidies creates a win-win for employers and employees.

Article updated September 23, 2013.