Determining What’s Affordable Under Health Reform

The government recently responded to employers who have questioned how to determine whether their coverage is “affordable” under the Patient Protection and Affordable Care Act (ACA).

A large employer generally is subject to an assessable payment if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and either

(1)   the employer does not offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage; or

(2)   the employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage that either is unaffordable or does not provide minimum value.

Whether an employer's health coverage is affordable to its fulltime employees is essential in determining whether an employee can receive a premium tax credit and, in turn, whether the employer is subject to an assessable payment.

Right now, coverage under an employer-sponsored plan is affordable to a particular employee if the employee's required contribution to the plan does not exceed 9.5% of the employee's household income for the taxable year.

The Internal Revenue Service has proposed a safe harbor that would set the affordability standard at 9.5% of wages, instead of 9.5% of household income.

Proposed Safe Harbor

In Notice 2011-73, the IRS notes that the safe harbor it plans to develop is designed to make it easier for employers to determine whether the health coverage they offer is affordable coverage. Thus, the safe harbor would use 9.5% of wages that the employer paid to an employee, instead of the employee's household income, as the standard for affordability.

This modification would be made in response to employers' comments that they generally do not know employees' household income and would be unable to determine coverage affordability using that information. This contemplated safe harbor would only apply for purposes of the employer shared responsibility provision, and would not affect employees' eligibility for health insurance premium tax credits, the IRS emphasized. An employee's eligibility for the premium tax credit would continue to be based on the affordability of employer-sponsored coverage relative to an employee's household income.

Application of the safe harbor would be determined after the end of the calendar year and on an employee-by-employee basis, taking into account the W-2 wages and the employee contribution. So, for example, the employer would determine whether it met the proposed 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 for the employer-provided health insurance premiums.

An employer also could use the safe harbor prospectively, at the beginning of the year, by structuring its plan and operations to set the employee contribution at a level so that the employee contribution for each employee would not exceed 9.5% of that employee's W-2 wages for that year, the IRS said. "It is contemplated that employers, on a consistent basis, would be permitted to make reasonable and necessary adjustments for pay periods so that the employee contribution does not exceed 9.5% of the employee's W-2 wages."

In particular, IRS seeks comments on the following issues:

• Whether or how wages and employee contribution amounts would need to be determined for employees who are employed by an employer for less than a full year, employees who move between full-time and part-time status, situations in which the plan year is not a calendar year, and other similar special circumstances.

• Whether there are other possible safe harbor methods for determining the affordability of coverage under an employer-sponsored plan for purposes of calculating an employer's potential assessable payment under IRC Sec. 4980H(b).

• How to coordinate any affordability safe harbor with the full-time employee look-back/stability safe harbor described earlier in Notice 2011-36.

Comments may be submitted via email to Notice.Comments@irscounsel.treas.gov. The deadline for comments is Dec.13, 2011. Comments should include a reference to Notice 2011-73.

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Internal Revenue Service Notice 2011-73, issued on September 13, 2011.

The shared responsibility provisions will apply to certain employers starting in 2014. The proposed safe harbor would set the affordability standard at 9.5% of wages, instead of 9.5% of household income.

In Notice 2011-36, the IRS sought comments on potential approaches that could be incorporated in future proposed regulations addressing ACA "shared responsibility" provisions, particularly the definition of a "full-time employee."