May 12, 2017
The IRS recently announced that the affordability percentage for 2018 plan years has decreased to 9.56% from 9.69% for 2017 plan years (see https://www.irs.gov/pub/irs-drop/rp-17-36.pdf).
In Revenue Procedure 2017-36, the IRS updated the Applicable Percentage Table in Code section 36B for 2018. This table is used by employer's subject to the Affordable Care Act (ACA)'s employer mandate, commonly referred to as "play or pay," to assess the affordability of the health plans offered to their full-time employees.
The table is also used to determine an individual's eligibility for a premium tax credit (subsidy) in the Marketplace. In addition, Rev. Proc. 2017-36 adjusts the required contribution percentage under Code section 5000A(e)(1)(A) for the 2018 plan year. This percentage is used to determine whether an individual is eligible for an exemption from the individual mandate for not having affordable minimum essential coverage.
Employers subject to the employer mandate are referred to as applicable large employers (ALE). Failure by an ALE to offer at least one "affordable" health plan option could result in a penalty assessment under Code section 4980H(b) for each full-time employee who obtains coverage in the Marketplace and qualifies for a subsidy in lieu of enrolling for coverage under the ALE's health plan.
Because an ALE generally will not know an employee's household income, the IRS has provided three optional affordability safe harbors that may be used to determine affordability based on information that is available to them - the Form W-2 safe harbor, the rate of pay safe harbor and the federal poverty level safe harbor.
An employer may use one or more of the affordability safe harbors if it offers its full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under a health plan that provides minimum value with respect to the self-only coverage offered to the employees. Note that the affordability safe harbors are only used to determine whether an employer's coverage satisfies the affordability test for purposes of the employer mandate. These safe harbors do not affect an employee's eligibility for a subsidy in the Marketplace, which is based on the affordability of employer-sponsored coverage relative to an employee's household income.
Under the Form W-2 safe harbor, an ALE may determine the affordability of its health coverage by reference only to an employee's wages from that ALE, instead of by reference to the employee's household income. For this purpose, "wages" is the amount that is required to be reported in Box 1 of the employee's Form W-2.
An ALE satisfies the Form W-2 safe harbor with respect to an employee if the employee's required contribution for the calendar year for the ALE's lowest cost self-only coverage that provides minimum value during the entire calendar year (excluding COBRA or other continuation coverage except with respect to an active employee eligible for continuation coverage) does not exceed 9.5%(as adjusted) of that employee's Form W-2 wages from the employer for the calendar year.
To be eligible for the Form W-2 safe harbor, the employee's required contribution must remain a consistent amount or percentage of all Form W-2 wages during the calendar year (or during the plan year for plans with non-calendar year plan years). Thus, an ALE may not make discretionary adjustments to the required employee contribution for a pay period. A periodic contribution that is based on a consistent percentage of all Form W-2 wages may be subject to a dollar limit specified by the employer.
ALEs determine whether the Form W-2 safe harbor applies after the end of the calendar year and on an employee-by-employee basis, taking into account W-2 wages and employee contributions.
The rate of pay safe harbor was designed to allow ALEs to prospectively satisfy affordability without the need to analyze every employee's wages and hours. For hourly employees, the rate of pay safe harbor allows an ALE to:
Specifically, the employee's monthly contribution amount (for the self-only premium of the employer's lowest cost coverage that provides minimum value) is affordable for a calendar month if it is equal to or lower than 9.5% (as adjusted) of the computed monthly wages (that is, the employee's applicable hourly rate of pay multiplied by 130 hours). The final regulations, unlike the proposed regulations, allow an ALE to use the rate of pay safe harbor even if an hourly employee's rate of pay is reduced during the year.
For salaried employees, monthly salary as of the first day of the coverage period would be used, instead of hourly salary multiplied by 130 hours. However, if the monthly salary is reduced, including due to a reduction in work hours, the rate of pay safe harbor may not be used.
An ALE may also rely on a design-based safe harbor using the federal poverty line (FPL) for a single individual. Employer-provided coverage is considered affordable under the FPL safe harbor 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% (as adjusted) of the FPL for a single individual for the applicable calendar year, divided by 12. The final regulations allow ALEs to use any of the poverty guidelines in effect within six months before the first day of the plan year for purposes of this safe harbor. The FPL for 2017 applicable to the 48 contiguous states and the District of Columbia is $12,060 (one person household).
The FPL safe harbor allows ALEs to disregard certain employees in determining the affordability of health coverage (that is, employees who cannot receive a Marketplace subsidy because of their income level or eligibility for Medicare, and therefore cannot trigger an ALE's liability for an employer mandate penalty). The FPL safe harbor also provides ALEs with a predetermined maximum amount of employee contribution that in all cases will result in the coverage being deemed affordable.
For More Information
For more information about this ACA Pathways or about any other health care reform-related provisions, please contact your Burnham Benefits consultant or Burnham Benefits at:
Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.