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June 29, 2015
It is important to understand whether coverage offered under an employer-sponsored group health plan is “affordable” for compliance with the employer shared responsibility rules under Section 4980H and for purposes of individual eligibility for tax subsidies through a public exchange. When setting plan contribution rates, employers should consider the IRS employer affordability safe harbors, the various elements that play into the determination of the employee contribution, and the penalties associated with not offering affordable coverage.
Applicable large employers–those with 50 or more full-time equivalents (FTEs)–are required to comply with the employer shared responsibility rules under Section 4980H (also known as the “employer mandate”). To avoid potential penalties, employers are required to offer minimum value, affordable coverage to substantially all full-time employees and their dependent children. In addition, individuals who are offered (or eligible for) minimum value, affordable coverage under an employer-sponsored group health plan are not eligible for a tax subsidy when purchasing individual health insurance through a public exchange.
One source of confusion is that there are two different types of affordability that an employer needs to consider. First is the definition of “affordable” that determines whether an individual is eligible for a subsidy when purchasing individual health insurance through a public exchange. Second is the definition of “affordable” under the employer safe harbors that is used to protect the employer from the 4980H(b) penalty in certain circumstances.
In general, for purposes of an individual’s subsidy eligibility, coverage is “affordable”if the employee’s required contribution for employee-only (single) coverage does not exceed 9.56% of the employee’s household income. However, for purposes of the employer safe harbors, the coverage is affordable if the employee’s required contribution for single coverage is less than 9.5% (not 9.56%) of one of three different standards: the employee’s W-2 wages, the employee’s hourly rate of pay, or the federal poverty level (FPL).
Affordability Safe Harbors
An employer is unlikely to know the employee’s household income, so the IRS provided three employer affordability safe harbors. When setting employer contribution rates, employers have the option to use one of three affordability safe harbors to provide more predictability in regard to whether the coverage will be considered affordable. So long as minimum value coverage is affordable under one of the three recognized safe harbors, the employer will be considered in compliance for purposes of avoiding a potential penalty under 4980H(b). Note that the use of the employer safe harbor does not change an individual’s possible eligibility for subsidies. An employer may choose to apply any of the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. The regulations provide that reasonable categories for this purpose generally include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide business criteria. Each safe harbor is described below:
Note that although the percentage of household income for purposes of affordability was raised to 9.56% for 2015 and will continue to be adjusted from year to year, when using any of the affordability safe harbors, employers must continue to use the 9.5% standard specified in the regulations because that percentage has not been updated.
Affordable and Not Affordable at the Same Time!
Subsidy eligibility will always be based on household income. However, if an individual qualifies for a tax subsidy because the employee contribution is deemed unaffordable using household income, but the employer can show that the coverage is affordable using one of the three safe harbor methods mentioned above, the employer will not be liable for a penalty under 4980H(b).
Consider the following example:
Determining Employee Contributions
In addition to the amount the employee is required to contribute toward the cost of employee-only (single) coverage, whether handled on a pre-tax or after-tax basis, several other employer provided benefits may affect what is considered the employee contribution for purposes of the affordability calculation as set forth below:
Setting Employer Contributions
It is not always financially advantageous to the employer to ensure that the coverage offered is affordable to ALL full-time employees. Employers should consider the $250/month cost of the penalty for a full-time employee receiving a subsidy. Often the employer contribution for employees who enroll in the employer’s plan is more than the employer would be required to pay as a penalty under 4980H(b). Furthermore, the 4980H(b) penalty applies only to those full-time employees who are actually enrolled through a public exchange and qualify for a tax subsidy.
Additionally, it is important to understand that there is nothing under 4980H rules that requires a uniform contribution rate across all categories of employees; rather, affordability is considered on an employee-by-employee basis. Therefore, the employer could choose to contribute differently to different categories of employees (i.e. a percentage of salary). However, anytime the employer sets different contribution rates for different categories of employees, nondiscrimination rules, which generally prohibit providing benefits in a way that favors the highly compensated individuals, must be considered.
When applicable large employers set employer contributions for health coverage, there are many variables that may affect the strategy chosen. The IRS has simplified things a bit by allowing employers to use one of three employer affordability safe harbors that provide a bit more predictability in regard to potential penalties as opposed to having to guess at an employee’s household income. Employers will also need to consider the various other benefits and incentives offered that may affect what is considered to be the employee contribution amount for purposes of calculating affordability. And finally, it is important to weigh the risk of a potential penalty of $250 per month under 4980H(b) for some employees versus choosing to set the employer contribution at a higher rate for all employees.
As always, should you have any questions, please contact your Parker, Smith & Feek Benefits Team.
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