Affordability Under the ACA: Things to Consider
The ACA requires employers with 50 or more full-time equivalent employees to offer health insurance coverage to at least 95 percent of their full-time workers, or else face potential penalties. While we may see changes to healthcare policy this upcoming year, until the law changes, employers need to comply with the ACA.
The ACA requires employers with 50 or more full-time equivalent employees to offer health insurance coverage to at least 95 percent of their full-time workers, or else face potential penalties, according to the IRS. The coverage that's offered has to provide minimum value and must meet the guidelines for affordability under the ACA. And while we may see changes to health care policy this upcoming year, until the law changes, employers need to comply with the ACA.
For 2017, coverage will be considered affordable if the employee's share of the premium for self-only coverage doesn't exceed 9.69 percent of their household income, according to the IRS.
Since employers don't tend to have access to details about employees' household income, the IRS allows employers to use one or more of the safe harbor methods for ensuring affordability. Finance leaders and HR leaders select which safe harbor they're going to use, and then ensure that the employee's portion of the premium doesn't exceed the amount permitted by the safe harbor method.
When the employer completes ACA informational reporting after the close of the year, the employee's share of the monthly premium — for affordability calculation purposes — is recorded on Line 15 of Form 1095-C.
But this amount might be very different from the amount that's actually payroll deducted from the employee's paychecks each month. The amount used for determining affordability is based on the cost of employee-only coverage, regardless of whether family members are added to the plan. And it's based on the lowest cost minimum value plan available to the employee, regardless of whether the employee is enrolled in that plan or a more costly one.
Wellness programs are popular with employers and employees alike, and employees can be offered lower health insurance premiums in exchange for participating in a wellness program. But when it comes to ACA affordability calculations, most wellness program discounts cannot be taken into consideration. According to the IRS, affordability calculations must use premiums that do not include any wellness program discounts, except for tobacco-related wellness programs.
So employers can use non-smoker premiums, or the premiums of smokers who participate in a tobacco cessation wellness program, when calculating affordability thresholds. But for all other wellness programs, the employer must use the full-price premiums — with no wellness program discount incorporated — for affordability calculations.
Beyond the Numbers
In terms of affordability, the rules the ACA imposes are fairly black and white. But finance leaders and HR leaders know that employee benefits are much more than just numbers. They're a powerful tool for attracting and retaining the best employees. According to the Society for Human Resource Management, the majority of employees consider their benefits package to be a very important factor in their overall job satisfaction.
So while organizations must remain in compliance with the ACA's guidelines for affordability, they must also work to ensure clear communication with employees, and determine whether to go beyond the basic affordability requirements of the ACA. There are several things to consider:
- Will the organization pay a portion of the premiums for dependents and spouses who are added to the plan? Affordability calculations are based entirely on the cost of employee-only coverage, regardless of whether family members are added to the plan. But the Kaiser Family Foundation found that employers still pay an average of 71 percent of the total premiums for family coverage, clearly going above and beyond the affordability requirements in the ACA. So while the ACA sets the minimum thresholds for avoiding penalties, organizations striving to maintain competitive benefits packages are likely to fund more of their employees' total premiums than the ACA requires.
- Will the organization offer coverage to spouses? The ACA doesn't require employers to offer coverage to employee's spouses. If employers offer coverage for spouses but don't pay for it, they could be inadvertently consigning their employees' households to the family glitch.
- How will you communicate affordability details to employees? Organizations are more likely to avoid marketplace notices if they clearly communicate coverage offers — and the details about affordability — with their employees.
These areas of HCM are tied in with the number crunching that goes into the affordability calculations required for ACA compliance. HR leaders and finance leaders must work together to ensure the organization is complying with the minimum standards for affordability under the ACA, but also incorporating the organization's overall objectives and efforts to maintain a competitive benefits package.