Employer-sponsored insurance is considered affordable if an employee’s share of the employee-only premium is less than 9.5% of the employee’s household income. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost option available to the employee that also meets the minimum value requirement. Because employers generally will not know their employees’ household incomes, employers can take advantage of one of the affordability safe harbors in the proposed regulations.
Affordability Safe Harbors
Recognizing that employers will generally not know an employee’s household income, the IRS provides three safe harbors for determining affordability of coverage:
- W-2 Safe Harbor – An employer will not be subject to an assessable payment if the required employee contribution toward the self-only premium for the employer’s lowest cost coverage that provides minimum value does not exceed 9.5% of the employee’s W–2 wages.
- Rate of Pay Safe Harbor – An employer can take the hourly rate of pay for each hourly employee and multiply that rate by 130 hours per month to determine a monthly “rate of pay.” The employee’s monthly contribution amount (for the self-only premium of the employer’s lowest cost coverage that provides minimum value) is affordable if it is equal to or lower than 9.5% of the computed monthly wage estimate. For salaried employees, monthly salary would be used instead of hourly salary, multiplied by 130.
- Federal Poverty Line Safe Harbor – An employer may also rely on a design-based safe harbor using the Federal Poverty Level (FPL) for a single individual. Coverage offered to an employee is affordable if the employee’s cost for self-only coverage does not exceed 9.5% of the FPL for a single individual. In 2012, for example, affordable coverage under this method would have been set at a monthly contribution in the lower 48 states of $88.43 for self-only coverage.
Potential Penalties
Under the ACA, Large Group employers will face financial penalties if the coverage they offer is unaffordable to employees with household income between 100% and 400% of the federal poverty level AND at least one employee receives a subsidy for coverage in the Exchange.
The penalty would be the lesser of $3,000 for each of those certain full-time employees or $2,000 for each full-time employee in excess of 30 employees.