Call us: (414) 276-2850
The Affordable Care Act: The Affordability Safe-Harbors (Part 2 of 8)
Last week I wrote a blog entry on the basics of the Affordable Care Act and some definitions that individuals should be familiar with when reading about the Act. Remember that effective on January 1, 2014, the Act states than an “applicable large employer” is liable for an assessment payment if any of its full-time employees (averaging 30 or more hours per week) is certified to receive an applicable premium tax credit or cost-sharing reduction and either:
(1) the employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage (MEC) under an eligible employer-sponsored plan; OR
(2) the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that, with respect to a full-time employee who has been certified to receive a tax credit or cost-sharing reduction, is either (i) unaffordable or (ii) does not provide minimum value.
As a reminder, “Minimum essential coverage” is coverage under a government-sponsored program; coverage under an employer-sponsored plan; plans in the individual market or other plans under § 5000A(f) of the Act. “Minimum value” states that a health plan must pay at least 60% of the covered health expenses for an individual.
A plan must also be “affordable” (an employee’s share of the health plan premium for “employee only” coverage does not exceed 9.5% of the employee’s gross income for the taxable year) so the IRS has created three safe harbors for an employer to use to determine what’s considered “affordable”.
The first affordability safe harbor is the W-2 Safe Harbor. For this option, affordability is determined by reference to an employee’s wages from the employer. Employers can use what is reported in Box 1 of Form W-2. To use this safe harbor the employer needs to meet the following requirements: (1) the employer must offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan and (2) that the employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value (the employee contribution) must not exceed 9.5% of the employee’s W-2 wages.
If the W-2 safe harbor is followed, no assessment payment will be due with respect to that employee even if that employee received a premium tax credit or cost sharing reduction. Application of this safe harbor will be determined after the end of the calendar year and on an employee-by-employee basis taking into account W-2 wages and the employee’s contribution.
For example, the employer would determine whether it met the affordability safe harbor for 2014 for an employee by looking at that employee’s W-2 wages for 2014 and comparing 9.5% of that amount to the employee’s 2014 employee contribution. The safe harbor would apply only for purposes of determining whether an employer’s coverage satisfies the 9.5% affordability test for purposes of the assessment payment (penalty); the safe harbor does not affect an employee’s eligibility for a premium tax credit.
For an employee who was not a full-time employee for the entire calendar year, the Form W-2 safe harbor is applied by adjusting the employee’s Form W-2 wages to reflect the period when the employee was offered coverage and then comparing those adjusted wages to the employee share of the premium during the period.
The second option is the “rate of pay” safe harbor. The employer may (1) take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan as of the beginning of the plan year; (2) multiply that rate by 130 hours per month (full-time status under § 4980H) and (3) determine affordability based on the resulting monthly wage amount. The employee’s monthly contribution amount (for the self-only premium of the employer’s lowest cost coverage that provides minimum value) is affordable if it is equal to or lower than 9.5 percent of the computed monthly wages (the employee’s applicable hourly rate of pay x 130 hours). For salaried employees, monthly salary would be used instead of hourly salary multiplied by 130.
An employer can use the rate of pay safe harbor if, with respect to the employees for whom it uses the safe harbor, the employer did not reduce the hourly wages of hourly employees or the monthly wages of salaried employees during the year.
The third and final sale harbor is the “poverty line safe harbor.” Employer-provided coverage offered to an employee is affordable if the employee’s cost for self-only coverage under the plan does not exceed 9.5% of the Federal Poverty Level for a single individual. Employers must use the most recently published poverty guidelines as of the first day of the plan year of the applicable large employer member’s health plan. This option was created in response to comments that determination of affordability should disregard employees whose income would qualify the employee for coverage under Medicaid.
The W-2 safe harbor is probably the easiest to follow. Employers have the employee’s W-2 information and can easily determine whether or not its coverage is deemed “affordable” under the Act.