ESRPs: What Employers Need to Know About Expiring Subsidies and Penalty Assessments

ESRP and Improperly Claimed Subsidies  

Applicable large employers (ALEs) (employers with 50+ employees) understand the implications of providing affordable health insurance to their employees. Failure to provide affordable health insurance exposes the ALE to the Employer Shared Responsibility Payment (ESRP). The ESRP can only be assessed against an ALE if an employee receives subsidized health coverage on an Exchange, often due to the ALE’s failure to offer affordable health insurance. However, ALEs are being assessed by the ESRP for improperly claimed subsidies. A recent report from the Paragon Health Institute found that improperly enrolled individuals in zero-premium plans account for $15 billion to $20 billion per year, potentially rising to $26 billion in 2024. 

The recent level of assessments goes beyond that allowed by the statutes. The IRS is seemingly issuing penalty assessments for every full-time employee who received a subsidy, even in cases where the employee falls into an affordability safe harbor. With the assessment of penalties, even when the employee is in an affordability safe harbor, one wonders if the IRS reviews the submitted tax records. Many ALEs have received initial assessable employee lists with W-2 income from the ALE that would make the ALE’s offer of coverage fall well below the affordability threshold. Furthermore, it is common for the ALE to submit this information multiple times and in various formats before the IRS grants penalty relief. The IRS hopes to win these wars of attrition. 

When to Expect Penalty Relief  

So, when is the penalty relief coming? 2026. Yes, that is 18 months away, but the domino chain reaction starts today, in 2024. Given the number of failed tax bill votes and stalled tax legislation, it may soon be too late to implement the continued enhanced exchange subsidies for 2026. 

During COVID, temporary increased exchange subsidies were passed as part of the American Rescue Plan Act (ARPA) for 2021 and 2022. Then, the Inflation Reduction Act (IRA) extended these enhanced subsidies for an additional three years, ending after 2025. While the improved subsidies expire at the end of 2025, insurers and regulators will want to know well in advance whether the subsidies will be renewed or discontinued so they can set accurate premiums for 2026. 

Every year, beginning March 15, insurers compile and then submit detailed rate filings proposing premium changes for the following year for review by state regulators. Regulators evaluate insurer justifications for premium increases, provide feedback to the insurers, and request revisions or additional justifications as deemed necessary. This process stretches into the summer each year, reaching its conclusion by August 25. This timeframe allows insurers to issue consumer notices and prepare for open enrollment. 
 
For the 2026 plan year, when the Inflation Reduction Act subsidies are set to expire, insurers will have to submit their proposed premiums and justifications in early 2025 and finalize their premiums by August 2025, in advance of the 2026 open enrollment period beginning November 1, 2025. Because of this lengthy process, insurers and state and federal regulators will want to know whether enhanced subsidies will expire or be renewed well before their expiration or renewal.  

Potential Consequences of Expiring Subsidies  

If the enhanced subsidies expire, almost all Marketplace enrollees will experience steep increases in premium payments in 2026. According to the Kaiser Family Foundation, “subsidized enrollees in states using Healthcare.gov, premium payments average about $672 per year in 2024 ($56 per month). Without enhanced subsidies, the average annual premium payment would rise by 93% ($624) to $1,296.” If this drastic increase in premium payments causes Marketplace participation to decrease to 2020 levels, approximately 10 million people would no longer be receiving subsidies.  

Employers and ESRP Relief  

While no employer wishes the loss of health insurance on anyone, they still want to avoid an ESRP notice. Since the IRS estimates that 27% of subsidies are improperly awarded and the Treasury Inspector General of Tax Administration (TIGTA) continues to pressure the IRS to collect the ESRP, employers will welcome ACA penalty relief wherever it comes from. 

Employers must stay informed about ESRP and potential subsidy changes. Use the form below to contact our advisors to learn more about navigating these complex regulations and minimizing your risk.