The Impact of the Inflation Reduction Act on Group Health Plans
On August 16, 2022, President Biden signed the Inflation Reduction Act. Employer-sponsored health plans are only indirectly impacted by the Act, but there are three main points to consider.
- Enhanced ACA premium tax credit
- Reduction on Prescription Drug Prices for Medicare
- Expanded Safe harbor for High Deductible Health Plans (HDHP)
Enhanced Premium Tax Credit. The favorable premium tax credit rules adopted in the American Rescue Plan Act (ARPA) will now remain in effect through 2025. One of the 2021 ARPA provisions was higher Affordable Care Act (ACA) premium subsidies for people who purchase health insurance through an Exchange and who are not eligible for other qualifying coverage or affordable employer-sponsored health insurance plans providing minimum value. The ACA limits the credit to taxpayers with household income between 100% and 400% of the federal poverty line who purchase insurance through an Exchange health plan.
ARPA eliminated the upper income limit for eligibility and increased the amount of the premium tax credit by decreasing, in all income bands, the percentage of household income that individuals must contribute for Exchange coverage. The adjusted percentage ranges from zero to 8.5%. The new legislation supersedes the previously released indexing adjustments, and instead of a range set from 1.9% to 9.12% will continue to range from zero to 8.5% through 2025.
ARPA also increased the amount of the premium tax credit. These subsidies granted eligibility to a larger pool of individuals than are typically eligible. Applicable large employers (ALEs) potentially face shared responsibility penalties if full-time employees receive premium tax credits, therefore expanded eligibility for the credits could increase penalty exposure for ALEs that do not offer affordable, minimum-value coverage to all full-time employees. Employers are encouraged to review their health plan with these premium subsidies in mind to ensure that the coverage they offer is affordable minimum essential coverage.
Reduction on Prescription Drug Prices for Medicare. Several cost reduction measures will benefit enrollees in Medicare Part D prescription drug coverage. Beginning in 2023 (i) manufacturers must pay Medicare a rebate if average prices of certain drugs increase faster than inflation; and (ii) cost-sharing for insulin will be capped at $35 per month. Starting in 2025, annual Part D out-of-pocket prescription drug costs will be capped at $2,000.
For the first time, HHS will be authorized (and required) to negotiate certain Medicare drug prices with manufacturers beginning in 2026. The legislation does not include comparable prescription drug cost reductions for private plans and may therefore, result in increased costs for employer plans and participants as pharmaceutical companies increase prices to private plans to make up for lost revenue.
Expanded Safe Harbor for HDHP. The legislation amends Internal Revenue Code §223 as it relates to individuals who are covered by a HDHP. Beginning after December 31, 2022, the plan will not lose their HDHP status and providing a safe harbor that permits plans to cover certain insulin products before the individual meets the plan’s deductible. This provision of the Act codifies and expands on previous IRS guidance expanding the list of preventive care benefits an HDHP can provide prior to satisfying the minimum deductible without impacting health savings account (HSA) eligibility.
While we do not offer legal or tax advice, group health plans and plan sponsors should not lose sight of these potential indirect impacts. While the Inflation Reduction Act may not directly impact employer sponsored health plans, employers could still feel the ripple effects with open enrollment beginning soon for many employers.