Employee Benefits: Is Your Health Plan Premium Affordable Under The ACA?
By now, most large employers are aware that they are required to offer “affordable” health care coverage to their full-time employees beginning in 2015 in order to avoid potential penalties under the shared responsibility (employer mandate) requirements of the Patient Protection and Affordable Care Act (ACA). However, large employers may be less knowledgeable regarding how to determine the affordability of their health plan premiums under the ACA. Recently issued final regulations provide for three separate “safe harbor” methods that may be used by large employers to determine affordability. A large employer subject to the employer mandate in 2015 (i.e., an employer that employed at least 100 full-time employees and/or full-time equivalent employees during 2014) that intends to minimize exposure to ACA penalties should review the safe harbors and determine which safe harbor, or combination of safe harbors, works best for its full-time workforce.
Affordability Safe Harbors Under the ACA
Under the ACA, coverage under an employer-sponsored plan is considered affordable if the employee’s required contribution for self-only coverage does not exceed 9.5% of the employee’s household income for the taxable year. Because an employer typically will not know an employee’s household income, the final regulations offer safe harbors that can be used by employers to determine affordability, based on information that is available to the employer. The safe harbors may only be used if the employer offers its full-time employees (and their dependents) the opportunity to enroll in self-only coverage that is considered minimum essential coverage and satisfies the ACA’s minimum value requirements. While an employer should assess whether its health plan satisfies the minimum essential coverage and minimum value requirements, it is likely that the health plans for most large employers will satisfy these requirements.
Use of any of the safe harbors is optional. An employer may choose to apply the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in the category. Reasonable categories include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide criteria.
Form W-2 Wages Safe Harbor
An employer satisfies the Form W-2 wages safe harbor with respect to a full-time employee if the required contribution for the calendar year for the employer’s lowest cost self-only coverage that provides minimum value during the entire calendar year does not exceed 9.5% of the employee’s Form W-2 wages for the calendar year. To qualify under this safe harbor, the employee’s required contribution must remain a consistent amount or percentage of Form W-2 wages for the entire calendar year. An employer is not permitted to make discretionary adjustments to the required contribution for a pay period. The regulations provide guidance regarding how an employer may satisfy this safe harbor with respect to employees who are not offered coverage for an entire calendar year.
While the application of this safe harbor is relatively simple, it does present certain challenges for employers. The primary challenge is that, because employers generally will not know an employee’s Form W-2 wages until after the close of the plan year, employers will have to wait until the end of the plan year to determine whether the premium amount that is set prior to the beginning of a plan year is considered affordable for its employees. For example, an employer cannot always accurately predict how many hours an hourly employee will work during the year. A premium that may appear affordable for an hourly employee that is anticipated to make $20,000 during a year, based on a standard work schedule, may no longer be affordable if that employee misses work due to an extended leave of absence or other work interruption. Additionally, because an employee’s Form W-2 wages exclude elective deferrals to Internal Revenue Code (Code) Section 401(k) and 403(b) plans, as well as contributions under a Code Section 125 plan, an employee’s Form W-2 wages will likely deviate from the employee’s base salary, which further complicates an employers’ task of determining an affordable premium.
One way of addressing these issues is for the employee contribution to be set at a level such that the contribution will not exceed 9.5% of the employee’s W-2 wages for any pay period. However, setting a premium based on a set percentage of wages could present its own set of problems with payroll administration.
An employer considering the Form W-2 wages safe harbor should analyze the potential impact of these issues before deciding whether the safe harbor is the best fit.
Rate of Pay Safe Harbor
Under the rate of pay safe harbor, coverage is considered affordable with respect to an hourly employee for a calendar month if the employee’s required contribution for the calendar month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.5% of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay as of the first day of the coverage period (generally the plan year) or the employee’s lowest hourly rate of pay during the calendar month. For non-hourly employees, the rate of pay safe harbor is satisfied if the required contribution does not exceed 9.5% of the employee’s monthly salary. This safe harbor is not available for a non-hourly employee if the monthly salary of the employee is reduced.
The rate of pay safe harbor is not affected by the number of hours worked by an employee or by an employee’s deferral elections. Accordingly, the rate of pay safe harbor provides predictability for employers who would prefer to know prior to the commencement of a plan year whether the applicable premium contribution it sets will be affordable. The safe harbor may be especially useful for employers that have hourly workforces with fluctuating schedules because, under the safe harbor, an employer may assume that an hourly employee worked 130 hours in each month, even if the actual hours worked are much less (e.g., due to a leave of absence or general work slow down). For example, under the rate of pay safe harbor, if an hourly employee earns $10 per hour in a calendar month (and earned at least $10 per hour as of the first day of the coverage period), an employer can require the employee to contribute up to $123.50/month (9.5% of $10 x 130 = $123.50) for its health plan premium, even if the employee has one or more calendar months in which the employee has a significant amount of unpaid leave or otherwise reduced hours.
Federal Poverty Line Safe Harbor
The easiest safe harbor to apply – but likely the most expensive for employers – is the federal poverty line safe harbor. The federal poverty line safe harbor is satisfied by an employer for a calendar month if the employee’s required contribution for the calendar month for the lowest cost self-only coverage that provides minimum value does not exceed 9.5% of a monthly amount determined as the federal poverty line for the a single individual for the applicable calendar year (determined by State of residence), divided by 12. This safe harbor provides employers with a predetermined maximum employee contribution that will in all cases result in the coverage being deemed affordable. Employers may use the poverty guidelines in effect within six months prior to the first day of the employer’s plan year. In 2014, the federal poverty line for a single individual is $11,670. Accordingly, using 2014 rates, the monthly premium under this safe harbor could not exceed $92.39 in 2015 ($11,670/12 x 9.5% = $92.39).
Failing to satisfy the affordability safe harbor with respect to a full-time employee could result in an annual penalty of $3,000 times the number of full-time employees who were not offered affordable coverage (an employer should be aware that, in addition to satisfying the affordability requirements, its coverage also must satisfy the ACA’s minimum value requirements to avoid this penalty). Accordingly, selecting an appropriate affordability safe harbor is an important component of developing an ACA compliance strategy. With the time for setting 2015 health plan premiums not too distant in the future, it is not too early for employers wishing to avoid ACA penalties to begin to consider how they will provide affordable coverage to full-time employees.