By Lara Cartwright-Smith

Background

As discussed in the GPS Health Reform Overview,^[1] the Affordable Care Act (ACA)^[2] imposes penalties on large employers who do not offer affordable insurance to their employees if those employees receive subsidies to purchase insurance elsewhere. For certain employees, the ACA required employers to provide a voucher for purchase of insurance through a state Health Insurance Exchange. However, this “Free Choice Voucher” requirement was repealed on April 15, 2011, as part of an appropriations bill.^[3]

Changes Made by the Health Reform Law (Pub. L. 111-148, Pub. L. 111-152)

Section 1513 of the ACA imposes a penalty through the tax code on large employers (those with more than 50 full-time employees) who do not offer affordable health insurance coverage to their employees, if one or more of their employees receives federal subsidies for health insurance (in the form of a premium tax credit or cost-sharing reduction).^[4] There is a two-tier penalty structure effective January 1, 2014. If the employer does not offer coverage at all and at least one employee receives a subsidy, the penalty is $2,000 per full-time employee, excluding the first 30 employees. If the employer offers coverage but it is not affordable for some employees and at least one employee receives a subsidy, the penalty is the lesser of $3,000 for each employee receiving a subsidy or $2,000 for each full-time employee. A plan is deemed not affordable (i.e., not providing minimum essential coverage) if an employee’s share of the single coverage premium exceeds 9.8% of the employee’s household income or if the plan’s share of health care expenses is less than 60% of the total covered health care expenses.^[5]

A separate requirement under Section 10108 of the ACA requires large employers that offer coverage to provide a free choice voucher to employees with incomes less than 400% of the federal poverty limit (FPL) who do not enroll in employer-sponsored coverage and whose share of the premium for employer-sponsored coverage would be greater than 8% but less than 9.8% of their income. The voucher amount is equal to what the employer’s share of coverage would have been if the employee were enrolled in the employer’s plan and can be used to offset the employee’s cost of purchasing insurance through an Exchange. Employers that provide free choice vouchers will not be subject to penalties for employees using those vouchers in an Exchange, even if they also receive subsidies.^[6]

Repeal of Free Choice Voucher Requirement

The free choice voucher requirement meant that a small subset of employees — those for whom the cost of employer-sponsored insurance was between 8% and 9.8% of their income — could choose between the employer’s plan and coverage through the exchange, where they were likely to qualify for subsidies (if the cost of employer coverage would exceed 9.5% of income and the cost of a silver plan in the exchange would exceed 9.5% of income). It is of course not clear how many employees would choose an Exchange over their employer’s plan, as the factors affecting that decision would vary by employer, state Exchange options, and individual preferences. However, some employers and other stakeholders were concerned that the voucher requirement would lead to adverse selection, since the lower-income employees who were likely to qualify for vouchers and move to an Exchange plan were more likely to be younger and healthier, making the pool of employees remaining in the employer plan relatively older and less healthy.^[7] Of course, this potential effect would vary based on many factors, including employee salaries, demographics, the size of the total employee pool, the attractiveness of the state Exchange plan relative to the employer plan in question, etc., so the actual impact of the policy could not be determined.

On April 14, 2011, Congress passed the Department of Defense and Full-Year Continuing Appropriations Act, which was signed into law by President Obama on April 15.^[8] Section 1858 of the Appropriations Act repealed the majority of Section 10108 of the ACA (all of the language related to the free choice voucher program) and made conforming amendments to the tax code. The effect of this repeal is that employers are no longer required to provide free choice vouchers to employees for whom the cost of coverage would be between 8% and 9.8% of income, but those employees are not eligible for federal subsidies to purchase coverage unless their share of the cost of coverage exceeds 9.5% of their income.

Senator Ron Wyden, who had offered the amendment to add the free choice voucher requirement to the ACA, decried its repeal and argued that employees whose share of coverage was under 9.8% of income but still unaffordable for them would have to go without coverage.^[9] However, individuals whose share of coverage exceeds 8% of income will have access to the state Exchange with subsidies on a sliding scale up to 9.5% of income (although they may also decline to purchase coverage without penalty^[10]) and individuals with incomes up to 133% FPL will have access to Medicaid.^[11]

Conclusion

The free choice voucher requirement would have shifted some of the cost of coverage for some individuals who purchase through the Exchanges from taxpayers to employers who offer health insurance coverage. Now, without this requirement, employees whose employers offer coverage will choose between that employer’s plan and coverage through the Exchange (subsidized or unsubsidized depending on income and eligibility).