Health Care Reform requires employers with 50 or more full-time employees to provide minimum essential coverage that provides minimum value to its full-time employees and their dependents or be subject to a tax penalty. The coverage provided must be affordable.
If an employee purchases coverage through the Health Insurance Marketplace (the Exchange) and receives a tax credit to purchase coverage, the government will look to see if the employee was offered coverage from his or her employer and if the coverage offered was affordable.
- What does affordable mean?
Affordability of health coverage is an calculation unique to each employee. Under the ACA, coverage is considered affordable for an individual if single coverage under the lowest-cost plan does not exceed 9.56% of the individual’s household income.
- What are the affordability safe harbors?
Since it is not always easy to determine household income, the IRS allows three safe harbors for determining affordability.
i. W-2 Safe Harbor. The employee’s required premium for lowest-cost, self-only coverage providing minimum value is not greater than 9.5% of the employee’s W-2 taxable (Box 1) income.
ii. Rate of Pay Safe Harbor. The employee’s required premium for lowest-cost, self-only coverage providing minimum value is not greater than 9.5% of the rate of pay as of the first day of the plan year.
iii. Federal Poverty Level Safe Harbor. The employee’s required premium for lowest-cost, self-only coverage providing minimum value is not greater than 9.5% of the federal poverty level for a single individual.
- Why does affordability matter?
Affordability only matters if an employee receives a premium tax credit to purchase coverage through the Exchange. If coverage is not affordable to an individual who gets a tax credit to purchase Exchange coverage, the employer will be subject to a penalty.
- Does an employer have to report affordability for each employee on the Form 1095 issued to the employee?
It appears that affordability does not actually have to be reported for each individual on the Form 1095. The Forms do ask for the cost of lowest cost single coverage. The reason for this is that affordability only becomes an issue if an employee goes to the Exchange, purchases coverage, and gets a tax credit. At that time, the government will take the information from the 1095-C to determine the cost of lowest single coverage to the employee. The government will be able to do the affordability calculation against the employee’s household income (from Form 1040), W-2 income (from W-2), rate of pay income (from W-2?) or federal poverty level. That is also why an employer has to indicate the method that it is using to determine affordability- so the government will know what calculation to use.
- Can employers determine affordability differently for different groups of employees?
Yes. An employer can apply the safe harbors to any reasonable category of employees, if it does so in a uniform and consistent basis for all employees in the category. A reasonable category would include specific job categories, hourly/salaried, geographic location or other business reason.
All employers should be evaluating their employee workforce to determine if they will have to satisfy the new reporting requirements under health care reform.
