Among the most important components of the Employer Mandate instituted by the Affordable Care Act (ACA) is the requirement that the coverage an organization offers to its employees must be "affordable." Here's a review of what affordability really means for your organization and what you need to know about 2016's affordability change.
Definition of Affordable
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 provided to the employee was deemed unaffordable. Generally, if an employee's share of the premium will cost more than 9.5 percent of their annual household income, then the employer-provided coverage isn't considered affordable. However, the regulations laid out by the IRS present three safe harbors that employers can use to satisfy the affordability requirement because employers generally will not know their employees' household incomes. Coverage will be considered be affordable if the employee's share of the premium does not exceed the following:
1. W-2 Method: 9.5 percent of the Form W-2 wages the employer pays the employee that year.
2. Rate of Pay Method: 9.5 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 is taken from the employee's pay rate when the coverage period starts. Accordingly, adjustments are permitted for hourly employees, if the pay rate is diminished; however, this is not true if the pay rate goes up.
3. Poverty Line Method: 9.5 percent of the federal poverty line for a single individual.
These safe harbors are all optional, and 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 that category. Reasonable categories generally include specified job functions, nature of compensation (e.g., salaried or hourly), geographic location and similar bona fide business criteria.
On December 16, 2015, the IRS issued Notice 2015-87 and indicated that the regulations would be updated to increase the affordability safe harbor percentages used by employers. The IRS stated that employers may rely on 9.56 percent for plan years beginning in 2015 and 9.66 percent for plan years beginning in 2016.
Although most employers that are subject to the ACA are aware of the requirement to offer insurance coverage to their employees, calculating affordability is a component that deserves significant attention. Offering minimum essential coverage to ACA full-time employees will help an employer avoid the most serious penalties under the ACA, but they could still be exposed to other penalties if the coverage they offer is deemed unaffordable. Therefore, it is crucial for employers to regularly take note of the affordability rules and to avail themselves of the safe harbors provided to ensure there are no surprises.