Employer contributions have for years been one of the linchpins of America's employer-based health care system. However, with the advent of the Affordable Care Act (ACA) that topic has taken on a life of its own, especially as far as compliance is concerned.
The most important impact on employer contributions is tied to the ACA's requirement that the coverage offered to ACA full-time employees must be affordable to those employees. An employer that offers health coverage may still be subject to penalties if one full-time employee receives a premium tax credit because the coverage offered to the employee was not affordable. Generally, if an employee's share of the premium will cost more than 9.66 percent of his or her annual household income, then the coverage isn't considered affordable.
The ACA regulations lay out three safe harbors that employers can use to satisfy the "affordable" requirement, which determine the coverage to be affordable if the employee's share of the premium does not exceed certain conditions:
1. W-2 Method: 9.66 percent of the Form W-2 wages the employer pays the employee that year
2. Rate of Pay Method: 9.66 percent of the employee's computed monthly wages, which is equal to 130 hours times the rate of pay. The rate of pay safe harbor can be found from the employee's rate of pay at the beginning of coverage, with changes allowed for an hourly employee, if the pay rate is lowered (but not for an increase)
3. Poverty Line Method: 9.66 percent of the federal poverty line for a single individual
Making the Choice
As an IRS Q&A on the subject explains that "an employer may choose to use one or more of these 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." Specified job categories, nature of compensation (i.e. salaried vs. hourly), geographic location and other similar bona fide business criteria all generally qualify as reasonable categories.
In designing their plans, employers must take care to ensure the allocation of premium costs between employer and employee is structured in a way that it complies with the affordability requirements.
It is important to note that the affordability test relates only to the cost of self-only coverage and does not impact the cost of coverage for dependents. Therefore, employers can require their employees to pay up to 100 percent of the premium cost of their dependents regardless of their income, and it won't affect whether the plan is considered affordable.
High Deductible Plans and Health Savings Accounts
One strategy many organizations are using is the implementation of high-deductible health plans (HDHP) that are linked to a health savings account (HSA). An HSA is a tax-exempt account that can be used to pay or reimburse certain medical expenses you incur. The use of HDHPs and HSAs has been on the rise in recent years. In fact, 24 percent of workers were in such plans in 2015, up from 13 percent in 2010, according to the Insurance Journal. These plans have lower premiums and let employees pick and choose their health care options more freely, and give employers more flexibility in terms of financial contributions while still remaining compliant.
According to the National Bureau of Economic Research, firms who used HDHPs over a three-year span saw "spending reduced," and those reductions were "driven by spending decreases in outpatient care," and "no evidence of increases in emergency department or inpatient care."
The concept of affordability remains a crucial component of any employer's health care strategy, as complying with the ACA's affordability requirements is essential for any organization that seeks to avoid ACA penalties. Many employers are therefore using methods, such as the implementation of HDHPs, to shift some of the costs of coverage from themselves to their employees.