Note: This is from ADP’s Eye on Washington Series, which focuses on legislative changes and clarifications per the Affordable Care Act. Click here to check out the Eye on Washington Series, and register to receive the newsletter: www.adp.com/regulatorynews.
Disclosure: I work for ADP. This information is purely educational, and based on Gov’t Regulation.
Eye On Washington: Health Care Reform
Updated: March 19, 2013
Affordable Care Act (ACA) Update: Affordability Safe Harbor Methods
As discussed in a recent Eye on Washington, the Internal Revenue Service (IRS) published a Notice of Proposed Rulemaking entitled “Shared Responsibility for Employers Regarding Health Coverage” on January 2, 2013. This Eye on Washington is the third in a series dedicated to highlighting the most relevant provisions that employers should know in preparation for the Employer Shared Responsibility elements of the Affordable Care Act (ACA).
Shared Responsibility applies to large employers with an average of at least 50 full-time employees, taking into account full-time equivalent employees (FTEs) employed during the preceding calendar year.
The proposed regulations modify a previously proposed safe harbor test, and introduce two new safe harbor measures, for determining affordability. Employees are eligible for premium tax credits to help purchase coverage for themselves in a public Exchange if employer-sponsored coverage is not offered, or does not meet certain affordability or minimum value requirements. Large employers may be assessed a Shared Responsibility penalty by the IRS if employees are awarded such premium tax credits through a public Exchange (aka Marketplace). Although employees qualify for premium tax credits based on household income, because household income is not known to the employer, these safe harbor measures have been proposed so that employers can determine whether employer-sponsored coverage qualifies as affordable.
In some cases, employees may qualify for premium tax credits because coverage offered by the employer is unaffordable based on household income; yet for the same employee, the employer may meet one of the affordability safe harbor measures described below, and consequently would not be liable for a Shared Responsibility payment.
Beginning in 2014, it will be important for employers that are subject to the ACA Shared Responsibility provisions to 1) determine whether employer-sponsored health coverage qualifies as “affordable” under the ACA under one or more of the affordability safe harbor tests, and 2) keep appropriate records of the results.
W-2 Safe Harbor Test Modified
The W-2 affordability safe harbor proposed in Notice 2011-73 is retained in modified form. This test determines affordability based on whether an employee’s premium contribution for the lowest-cost, self-only coverage that provides minimum value exceeds 9.5% of the employee’s wages as reported on Form W-2 Box 1 for the calendar year.
The proposed regulations did not provide for any “add backs” to Box 1 wages – for example, for 401(k) or cafeteria plan deductions that are not included in Box 1. Thus, the safe harbor will be applied based on the employee’s unadjusted Form W-2 Box 1 amount. In practice, this could mean that employees earning the same amount with the same healthcare premiums could have different results under this test depending on the amount of their respective pretax deductions, such as 401(k) or other retirement plan contributions and Section 125 (cafeteria plan) elections.
Adjustment for Employees Who Were Not Full Time for the Entire Year
For employees who are not full time for an entire calendar year, wages must be adjusted to reflect the period when the employee was offered coverage. In this case, Box 1 wage amounts should be adjusted by multiplying the Box 1 wages by a fraction, which is the number of calendar months during which coverage was offered, over the number of calendar months the individual was employed during the calendar year. That wage amount is compared to the employee premium for the months coverage was offered to determine if the premium exceeds 9.5% of wages during the period coverage was offered. (If coverage was offered or the individual was employed for at least one day during the calendar month, the entire calendar month is counted for purposes of this calculation.)
To qualify for this safe harbor, the employee’s required premium contribution must remain a consistent amount or percentage of all Form W-2 wages during the calendar year (or the portion of each plan year during the calendar year, for plans with non-calendar year plan years) but may be subject to a dollar limit set by the employer. An employer can apply this safe harbor at the end of the calendar year or prospectively to set the employee contribution so that the contribution does not exceed 9.5%.
Example: Employee A is employed by a large employer from May 15 through December 31, 2015. The employer offers coverage to Employee A from August 1, 2015 through December 31, 2015. The employee contribution for self-only coverage is $100 per calendar month, or $500 for Employee A’s period of employment. For 2015, Employee A’s Form W-2 Box 1 wages with respect to employment with X are $15,000.
To apply the affordability safe harbor, the Form W-2 Box 1 wages are multiplied by 5/8 (5 calendar months of coverage offered over 8 months of employment during the calendar year). Affordability is determined by comparing the adjusted W-2 wages ($9,375, or $15,000 x 5/8) to the employee contribution for the period for which coverage was offered ($500). Because $500 is less than 9.5% of $9,375, the coverage is affordable for 2015 ($500 is 5.33% of $9,375).
New Affordability Safe Harbor Tests
Rate of Pay Safe Harbor – The proposed regulations provide for an additional affordability safe harbor based on an employee’s rate of pay as of the first day of the coverage period (generally the first day of the plan year).
For an hourly employee, who is eligible to participate in the health plan as of the beginning of the plan year, the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value cannot exceed 9.5% of the employee’s hourly rate of pay as of the first day of the coverage period multiplied by 130 hours.
For a salaried employee, who is eligible to participate in the health plan as of the beginning of the plan year, the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value cannot exceed 9.5% of the employee’s monthly salary amount. (For this purpose, an employer can use any reasonable method for converting payroll periods to a monthly salary.)
An employer can use this safe harbor only if the employer did not reduce an employee’s pay during the year, including by transferring the employee to another employer within the same controlled group.
Example: Employee B is employed for the full year of 2015 with an employer that offers minimum essential coverage that provides minimum value. The employee contribution for self-only coverage is $85 per calendar month. Employee B is paid $7.25 per hour for the entire year.
The employer may multiply 130 hours of service by $7.25 per hour and compare the result ($942.50) to the employee contribution per month ($85). Because $85 is less than 9.5% of Employee B’s assumed income, the coverage offered is treated as affordable for 2015 ($85 is 9.01% of $942.50).
Federal Poverty Line (FPL) Safe Harbor – The proposed regulations added a third affordability safe harbor based on the Federal Poverty Line (FPL). (Individuals below the FPL will generally qualify for Medicaid.) For coverage to be affordable, the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value cannot exceed 9.5% of the FPL for the applicable calendar year, divided by 12. Employers can use the most recently published FPL as of the first day of the plan year and must use the FPL applicable to the State in which the employee is employed.
Example: Employee C is treated as a full-time employee for the entire calendar year 2015. Employee C is regularly credited with 35 hours of service per week but is credited with only 20 hours of service during the month of March, 2015 and only 15 hours of service during the month of August, 2015. Assume that the Federal Poverty Line for 2015 for an individual is $11,170. The employer sets the annual employee contribution for employee single-only coverage for each month in 2015 as an amount equal to 9.5% multiplied by $11,170, which is $1,061.15, and then divides by 12 for a monthly premium of $88.43.
Regardless of Employee C’s actual wages for any month, including March and August, when Employee C has lower wages because of significantly lower hours of service, the coverage under the plan is treated as affordable.
What’s Next in the Shared Responsibility Series?
Employers that are subject to the Shared Responsibility provisions will have several new administrative responsibilities, whether or not they offer qualifying health coverage. A future edition of the Eye on Washington Shared Responsibility series will focus on new employer reporting obligations. Regulations as to the new health coverage reporting requirements that will be effective in 2014 are expected to be released soon.