IRS safe harbor test to determine affordability – comments encouraged
The affordability provision of the shared responsibility section of the Patient Protection and Affordable Care Act (PPACA) requires employers that offer health insurance to provide coverage that costs less than 9.5% of the modified adjusted gross income of an employee’s household. That’s a lot of technical speak, but for many, the big question is “How will we know what our employee’s household income is?”
The IRS has proposed a safe harbor test for employers to help them determine if their plans are affordable as part of the shared responsibility provisions of the Patient Protection and Affordable Care Act. They are seeking comments on this proposed safe harbor, and WGA would encourage employers that may be subject to potential penalties to review the safe harbor and provide comments. In a nutshell, employers would test:
- Ensure that your eligibility rules comply with PPACA requirements, and all eligible, full-time employees are offered coverage
- Take the contribution for employee only (single) for your lowest cost plan
- Review your employee’s prior year Box 1, W-2 wages
- If the annual single contributions for your lowest cost plan are less than 9.5% of that employee’s Box 1 wages, then you would be exempt from any penalties for that employee, even if they qualify for premium credits as part of a household.
Here are two examples:
1. Company A offers its employees a choice of 3 plans. The lowest cost plan has a single contribution of $75 per month, about average, or $900 per year.
Any employee making more than $9,474 per year ($900/9.5%) would be exempt from penalties, which would probably mean all employees in most situations.
2. Company B offers its employees a choice of 2 plans. The lowest cost plan requires employees to pay 50% of the cost, or $225 per month. This equals $2,700 per year.
Therefore, any employee making more than $28,421 per year would be exempt, but this company has a lot of low wage employees. They may still benefit by the safe harbor, but they will probably also pay penalties.
In addition, the ease of administration compared to attempting to collect household income is a big relief for many.
WGA is encouraging employers to read the IRS news release about the commentary period. In addition, here is a link to the more descriptive notice about the safe harbor. Comments can be provided via email to: Notice.Comments@irscounsel.treas.gov.
William Gallagher Associates is a leading provider of insurance brokerage, risk management and employee benefits services to firms with complex risks and dynamic needs, within industries that include technology, life sciences, financial risks, health care, renewable energy & clean technology, and environmental services. WGA has offices in Boston, MA; New York, NY; Hartford, CT; Princeton, NJ; Columbia, MD; and Atlanta, GA.