Consultant’s Corner: Health Plan Affordability Thresholds
Q: Under the Affordable Care Act, if I offer a health plan to my employees, what are the implications of the 9.5% of employee income threshold?
Our response assumes that your question refers to the safe harbor tests that can be used by applicable large employers (ALEs) under the Affordable Care Act or ACA to determine whether the employer-sponsored health coverage they offer their employees meets the ACA’s affordability requirement. The affordability requirement is one of the requirements ALEs offering employer-sponsored health coverage must meet in order to avoid having to make Employer Shared Responsibility payments, or pay penalties under the ACA. If an employee’s share of the premium for employer-sponsored health coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee.
For 2016, the 9.5% threshold has been adjusted upward to 9.66% of annual household income by the IRS. While you may find it beneficial to review the ACA’s affordability safe harbor tests for employer-sponsored health coverage and how they may affect you personally with your employer’s HR department or other fringe benefits staff and your tax advisor or CPA if necessary, you can review IRS and related information on the ACA’s affordability safe harbor tests for employer-sponsored health coverage at the following websites, the first of which explains…
“18. Under what circumstances will an employer owe an Employer Shared Responsibility payment?
For 2015 and after, an applicable large employer will be liable for an Employer Shared Responsibility payment only if:
(a) The employer does not offer health coverage or offers coverage to fewer than 95% of its full-time employees and the dependents of those employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on a Marketplace;
OR
(b) The employer offers health coverage to all or at least 95% of its full-time employees, but at least one full-time employee receives a premium tax credit to help pay for coverage on a Marketplace, which may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee (see question 19, below) or did not provide minimum value (see question 20, below).
But see question 33 for transition relief with respect to offers of coverage to dependents for 2015, questions 34 through 36 for 2015 transition relief for certain employers with fewer than 100 full-time employees (including full-time equivalents), and question 37 for 2015 transition relief for all other employers with respect to the percentage of full-time employees to whom coverage must be offered to avoid the payment described in paragraph (a) above.
- How does an employer know whether the coverage it offers is affordable?
If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee. Because employers generally will not know their employees’ household incomes, employers can take advantage of one or more of the three affordability safe harbors set forth in the final regulations that are based on information the employer will have available, such as the employee’s Form W-2 wages or the employee’s rate of pay. If an employer meets the requirements of any of these safe harbors, the offer of coverage will be deemed affordable for purposes of the Employer Shared Responsibility provisions regardless of whether it was affordable to the employee for purposes of the premium tax credit.
The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. These safe harbors are all optional. An employer may use one or more of the safe harbors only if 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 provides minimum value for the self-only coverage offered to the employee. An employer may choose to use one or more of the safe harbors for all of its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost self-only option available to the employee that also meets the minimum value requirement (see question 20, below.)
The Form W-2 wages safe harbor generally is based on the amount of wages paid to the employee that are reported in Box 1 of that employee’s Form W-2. The rate of pay safe harbor generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased). The federal poverty line safe harbor generally treats coverage as affordable if the employee contribution for the year does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year. The final regulations provide additional information on these affordability safe harbors.
- How does an employer know whether the coverage it offers provides minimum value?
A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. The Department of Health and Human Services (HHS) and the IRS have produced a minimum value calculator. By entering certain information about the plan, such as deductibles and co-pays, into the calculator employers can get a determination as to whether the plan provides minimum value. Additionally, on May 3, 2013, Treasury and the IRS issued proposed regulations regarding the other methods available to determine minimum value.
- If an employer offers health coverage that is affordable and that provides minimum value to its full-time employees and offers health coverage to the dependents of those employees, will it be subject to an Employer Shared Responsibility payment if some of its employees purchase health insurance through a Marketplace or if some of its employees enroll in Medicare or Medicaid?
No. An applicable large employer will not be subject to an Employer Shared Responsibility payment solely because one, some, or all of its employees purchase health insurance coverage through a Marketplace or enroll in Medicare or Medicaid. An employer will not be liable for an Employer Shared Responsibility payment unless at least one full-time employee receives a premium tax credit. In general, an employee will not be eligible for a premium tax credit if the employer has offered that employee health coverage that is affordable (see question 19) and that provides minimum value (see question 20), even if that employee rejects the offer of coverage and instead enrolls in coverage through a Marketplace or enrolls in Medicare or Medicaid. If no full-time employee receives a premium tax credit, the employer will not be subject to an Employer Shared Responsibility payment.
- If an employer offers health coverage that is affordable and that provides minimum value to its full-time employees and offers health coverage to the dependents of those employees, will it be subject to an Employer Shared Responsibility payment if an employee’s spouse purchases health insurance through a Marketplace, or if a spouse enrolls in Medicare or Medicaid?
No. To avoid a potential Employer Shared Responsibility payment an applicable large employer must offer health coverage that is affordable and provides minimum value to its full-time employees and must offer health coverage to the dependents of those employees (see questions 18, 19 and 20). For this purpose, a spouse is not a dependent. An applicable large employer will not be subject to an Employer Shared Responsibility payment solely because it does not offer health coverage to an employee’s spouse or if the spouse purchases health insurance coverage through a Marketplace or enrolls in Medicare or Medicaid. An employer will not be liable for an Employer Shared Responsibility payment unless a full-time employee receives a premium tax credit. If no full-time employee receives a premium tax credit, the employer will not be subject to an Employer Shared Responsibility payment. Thus, even if an employee’s spouse receives a premium tax credit, the employer will not be subject to an Employer Shared Responsibility payment.
If an applicable large employer offers health coverage that is affordable and that provides minimum value to a full-time employee’s spouse, the spouse will not be eligible for the premium tax credit. For more information about eligibility for the premium tax credit, see our final regulations and questions and answers.
- If an employer offers health coverage that is affordable and that provides minimum value to its full-time employees and offers health coverage to the dependents of those employees, will it be subject to an Employer Shared Responsibility payment if some of its employees purchase health insurance coverage for their dependents through a Marketplace or if some of its employees enroll their dependents in Medicare or Medicaid?
No. An applicable large employer will not be subject to an Employer Shared Responsibility payment solely because one, some or all of its employees purchase health insurance coverage for their dependents through a Marketplace or enroll their dependents in Medicare or Medicaid. An employer will not be liable for an Employer Shared Responsibility payment unless a full-time employee receives a premium tax credit. If no full-time employee receives a premium tax credit, the employer will not be subject to an Employer Shared Responsibility payment.
If an employer offers health coverage that is affordable (see question 19) and that provides minimum value (see question 20) to the dependents of its full-time employees, those dependents will not be eligible for a premium tax credit. For more information about eligibility for a premium tax credit, see our final regulations and questions and answers.”
https://www.irs.gov/affordable-care-act/employers/minimum-value-and-affordability
“The IRS has announced that the inflation-adjusted percentage used to determine what is “affordable” health coverage for individuals will also apply to the safe harbor for employers.
Under a safe harbor set forth in the Affordable Care Act’s (ACA’s) employer shared-responsibility provisions (also known as “pay or play”), health coverage has been deemed to satisfy the requirement to be affordable if the lowest-cost self-only coverage option available to employees does not exceed 9.5 percent of any one of the following:
- The employee’s W-2 wages.
- The employee’s rate of pay.
- The federal poverty level.
The three-pronged affordability safe harbor is used so that employers have penalty protection for what they declare as “affordable” on Line 16 of IRS Form 1095-C. The safe harbor concept is the standardized way IRS regulations address the fact that employers would not know their employees’ household incomes.
For 2015, the IRS increased the applicable threshold percentage for purposes of “household income” from 9.5 percent to 9.56 percent to account for increases in health insurance premiums and income growth, with a further increase to 9.66 percent announced for 2016. But the IRS did so with regard to the affordability percentage that marketplace exchanges can use to test compliance with the ACA individual mandate. The IRS did not explicitly increase the percentage for use in the employer safe harbor test above the statutory 9.5 percent. That led many benefit attorneys to advise their clients to continue using a contribution percentage of 9.5 percent to measure their plan’s affordability.
While the controversy over the affordability percentage has divided employee benefits attorneys and confused business owners and HR professionals, new guidance clarifying the issue was released on Dec. 16.
According to IRS Notice 2015-87:
Treasury and IRS intend to amend the regulations under § 4980H to reflect that the applicable percentage in the affordability safe harbors should be adjusted … so that employers may rely upon the 9.56 percent for plan years beginning in 2015 and 9.66 percent for plan years beginning in 2016…”
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/aca-affordability-percentage.aspx
