Among the numerous Patient Protection and Affordable Care Act (PPACA) terms that have left employers scratching their heads, few are as puzzling as what constitutes “affordable” health care.
The law didn’t lack specifics. It was plain from its language that a penalty may arise when the health plan coverage of a large employer (50 or more full-time employees, including full-time equivalent employees) is unaffordable or does not provide minimum value for a full-time employee certified to the employer as having received a premium tax credit or cost-sharing reduction. For purposes of the premium tax credit, employer coverage is affordable if the employee’s required contribution for coverage of himself or herself does not exceed 9.5 percent of the employee’s household income for the taxable year.
The specifics just didn’t, as a practical matter, make much sense.
How exactly was an employer to ascertain an employee’s household income for the taxable year? Ask him or her? Employers initially were at a loss.
Fortunately, the Internal Revenue Service (IRS) floated one alternative in 2011—the Form W-2 safe harbor—and added two more in a Jan. 2, 2013, notice of proposed rulemaking—the rate-of-pay safe harbor and the federal-poverty-line safe harbor.
W-2 Safe Harbor
The proposed rule first clarified some things about the W-2 safe harbor.
Under the Form W-2 safe harbor, an employer could determine affordability by referring to an employee’s wages from that employer. Wages for this purpose would be the amount required to be reported in box 1 of Form W-2.
Application of this safe harbor is determined after the calendar year on an employee-by-employee basis. So, the employer would determine whether it met the Form W-2 safe harbor for 2014 by looking at a particular employee’s 2014 Form W-2 wages—the wages reported on the 2014 Form W-2 that is furnished to the employee in January 2015.
Or an employer could use this safe harbor prospectively at the beginning of the year, to set the employee contribution at a level so that the contribution for each employee would not exceed 9.5 percent of that employee’s Form W-2 wages for that year. For example, an employer could automatically deduct 9.5 percent, or a lower percentage, from an employee’s Form W-2 wages for each pay period, the IRS noted in the proposed rule.
In response to the Form W-2 safe harbor’s unveiling in 2011 (IRS Notice 2011-73), several commenters noted that box 1 of Form W-2 excludes elective deferrals that an employee makes into a Section 401(k) plan, and excludes amounts that an employee elects to contribute to a Section 125 cafeteria plan through salary reduction. They argued that an employee’s total compensation instead should be the measure for purposes of this affordability safe harbor calculation, including elective deferrals to a retirement savings plan or cafeteria plan, but the IRS disagreed.
Commenters also recommended several approaches on how wages and employee contributions would be determined for workers employed for less than a full year by an employer, such as prorating wages and premiums, using a reasonable estimate of Form W-2 wages for the year, or applying the safe harbor on a month-by-month basis.
In its proposed rule, the IRS provided that for someone who was not a full-time employee for the entire calendar year, the Form W-2 safe harbor is applied by adjusting the employee’s Form W-2 wages. The wages should reflect the period when the employee was offered coverage, and then compare those adjusted wages to the employee share of the premium during that period.
“Specifically, the amount of the employee’s compensation for purposes of the safe harbor is determined by multiplying the wages for the calendar year by a fraction equal to the months for which coverage was offered to the employee over the months the employee was employed,” the agency stated. “That adjusted wage amount is then compared to the employee share of the premium for the months that coverage was offered to determine whether the Form W-2 safe harbor was satisfied for that employee.”
Rate-of-Pay Safe Harbor
Not all the commenters were wild about the W-2 safe harbor, and some suggested instead a safe harbor based on a rate of pay.
In response, the IRS proposed a rate-of-pay safe harbor where the employer would:
- Take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan as of the beginning of the plan year.
- Multiply that rate by 130 hours per month (the benchmark for full-time status for a month under PPACA Section 4980H).
- Determine affordability based on the resulting wage amount.
Under this safe harbor, the employee’s monthly contribution amount is affordable if it is equal to or lower than 9.5 percent of the computed monthly wages. For salaried employees, monthly salary would be used instead of hourly salary multiplied by 130.
This safe harbor is unavailable under the proposed rule if the employer reduced the wages of hourly employees or the monthly wages of salaried employees during the year.
Federal-Poverty-Line Safe Harbor
Commenters recommended a third alternative. Under this method, employers would determine affordability by disregarding employees whose income would qualify the employee for coverage under Medicaid and thus would disqualify the employee from receiving the premium tax credit, they suggested. Employees who cannot receive a premium tax credit, which is not available by law to individuals with income below 100 percent of the federal poverty line, cannot trigger the PPACA Section 4980H(b) penalty.
The IRS was game, proposing that an employer may rely on a safe harbor using the federal poverty line for a single individual. “For purposes of Section 4980H, employer-provided coverage offered to an employee is affordable if the employee’s cost for self-only coverage under the plan does not exceed 9.5 percent of the federal poverty line for a single individual,” the proposed rule states. Employers could use the most recently published poverty guidelines as of the first day of the plan year of the large employer member’s health plan.
The three proposed safe harbors do not apply for purposes of determining the penalty on large employers under PPACA Section 4980H(a). Unlike Section 4980H(b)’s penalty on unaffordable coverage, Section 4980H(a) imposes a penalty on large employers that fail to offer coverage to full-time employees and their dependents. “Dependents” does not include spouses, Adam Solander, an attorney with Epstein Becker Green in Washington, D.C., said at the firm’s Jan. 9, 2013, webcast on the law’s shared responsibility rules.
Remaining Head Scratchers
Employers still await agency guidance on “minimum value,” noted Frank Morris Jr., also an attorney in the firm’s D.C. office. Expect a minimum value calculator from the IRS soon, he said. Morris added that it will be “essential to ensure plan design meets minimum value” when it is made available.
Also expect regulations soon from the U.S. Department of Health and Human Services (HHS) on its process for informing employers that an employee is certified eligible for a premium tax credit.
And HHS, the IRS and the Labor Department will provide more guidance on the Public Health Service Act’s prohibition, as implemented by the PPACA, on waiting period limits of more than 90 days. “Employers will need to be sure they’re on top of that,” he concluded.
Allen Smith, J.D., is manager, workplace law content, for SHRM. To read the original article on shrm.org, please click here.