The Affordable Care Act (ACA) has imposed an array of new requirements on employers, and organizations of all sizes are looking for ways to simplify ACA compliance. According to an ADP white paper, 4 ACA Compliance Challenges, affordability issues are among the most challenging aspects of ACA compliance. And while this upcoming year employers may see changes to health care policy, until the law changes, employers need to continue to comply with the ACA.
Here's what you can do to simplify the complications surrounding the ACA's affordability requirements.
What the Law Requires
Under the ACA, all applicable large employers (ALEs) — organizations with at least 50 full-time equivalent employees, according to the IRS — must offer affordable health insurance that provides minimum value to at least 95 percent of full-time employees. Otherwise, they risk a penalty under the employer shared responsibility provisions. In 2017, "affordable" is defined as costing the employee no more than 9.69 percent of household income.
3 Affordability Safe Harbors
Although you may be willing to comply with the law and provide affordable coverage to employees, doing so isn't as simple as it sounds. Affordability ranked third in terms of ACA compliance challenges for employers, according to ADP. Only annual reporting and accuracy of completed forms were considered more challenging. It's difficult for employers to know an employee's household income so the IRS offers three safe harbor methods to ensure coverage is affordable. They're optional, but will simplify ACA compliance.
1. W-2 Wages
Determine affordability based on an employee's premium contribution as a percentage of W-2 wages by using the wages in Box 1 of their W-2. This number is reduced if the employee makes salary reduction elections via a 401(k) or Section 125 cafeteria plan. The IRS clarified in 2014 that employers cannot add back the salary reductions before making the safe harbor affordability determination.
2. Rate of Pay
You don't have to keep track of hours and the actual amount employees earn. Instead, use their hourly rate of pay as of the start of the coverage period, and multiply it by 130. Even if an employee ends up taking a significant amount of unpaid time off or has a reduction in hours, you can still use the same required premium contribution for each month of the year. However, if their hourly rate of pay is reduced, you must recalculate the allowable premium contribution for the months that the employee has a lower rate of pay.
3. The Federal Poverty Level
Using the federal poverty level safe harbor method is usually the easiest of the three and results in the most simplified affordability tracking. But in most cases, it will also result in higher premium contributions for the employer.
What About Wellness Programs?
Wellness programs are another aspect of affordability that can be a headache for employers when it comes to affordability compliance. Wellness programs are popular among employers, and it's common to see wellness programs that provide financial incentives, including reduced health insurance premiums, for employees who participate.
There are a variety of rules related to wellness programs to ensure they're nondiscriminatory and available to all employees. But regardless of the measures an employer takes to give employees equal access to a wellness program, some employees will be unable to complete the program or qualify for its incentives. Because of these concerns, the IRS has said employers must base affordability calculations on the assumption employees don't complete the wellness program requirements.
For wellness programs aimed at tobacco cessation and prevention, employers can calculate affordability based on the assumption that employees do complete the program's requirements. This is in line with the ACA's provision that tobacco use can still be used to set health insurance premiums, whereas all other health-related factors can no longer be used.
Outsourcing to Simplify ACA Compliance
As long as you're aware of what's included in the calculations and how safe harbor methods work, compliance with the ACA's affordability requirement can be straightforward. But outsourcing your ACA compliance is another way to simplify the whole process. ADP found an increasing number of organizations are considering this option. Employers have to balance the ACA's requirements — and the organization's willingness to provide high-quality coverage to their employees — with their own bottom line.
The right solution depends on your unique situation, but there are ACA compliance vendors that can help you simplify compliance, regardless of what level of assistance you need.
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