Group Health Plan Affordability Under the ACA (Benefit Minute)
Under the Affordable Care Act (ACA), an employer with 50 or more full time equivalent employees that offers group health plan coverage to full time employees may still be subject to a penalty under Code Section 4980H(b) beginning in 2015 or 2016 if the coverage offered does not meet certain minimum value and affordability standards. The 4980H(b) penalty is $3,000 per year ($250 per month) for each employee who qualifies for a premium tax credit (subsidy) for a Marketplace plan. Most group health plans meet or exceed the minimum value standard (unless specifically designed otherwise). The affordability standard is discussed below.
Group health plan coverage will meet the affordability standard if the employee is asked to pay no more than 9.5% (9.56% in 2015) of household income for employee-only coverage for the lowest-cost plan option that provides minimum value. If the employer offers multiple plan options, only one has to meet the affordability standard. The employee’s cost to cover dependents may exceed the affordability standard without exposing the employer to the 4980H(b) penalty. However, the availability of affordable employee-only minimum value coverage from the employer disqualifies all eligible family members from the premium tax credit.
If an employee chooses to purchase a Marketplace plan instead of the group health plan, and the employee qualifies for a premium tax credit because the employer’s coverage was not affordable, then the employer will be subject to the $3,000 penalty (on an annual basis) with respect to that employee.
Affordability Safe Harbors
Since an employer does not know an employee’s household income and therefore cannot properly assess whether the group health plan coverage is affordable, the IRS has provided three safe harbors. If the employee’s required contribution meets one of these safe harbors, the employer will not be subject to the 4980H(b) penalty, even if the employee qualifies for a premium tax credit based on household income. The safe harbors are:
- FPL safe harbor – the employee contribution can be no more than 9.5% of the federal poverty level for a single individual. The FPL is the rate in effect within 6 months before first day of the plan year. The current FPL is $11,670 which equates to a maximum contribution of $1,109 per year or $92 per month.
- Rate of pay safe harbor – for hourly employees, the monthly employee contribution cannot exceed 9.5% multiplied by hourly rate of pay multiplied by 130 hours. The rate of pay is the rate as of first day of plan year or lowest rate of pay for the calendar month, whichever is less. For salaried employees, the contribution cannot exceed 9.5% of employee’s monthly salary as of first day of plan year. This safe harbor is not available if monthly salary is reduced.
- Form W-2 safe harbor for the year – the employee contribution cannot exceed 9.5% of Box 1 wages (taxable wages, not gross wages) and must remain a consistent dollar amount or percentage of W-2 wages during the calendar year (or during the plan year for non-calendar year plans). Applicability of this safe harbor will be determined after end of calendar year on employee-by-employee basis (unless the employee is only eligible for part of the plan year). If an employer uses this safe harbor for an employee, it must be used for all months of the calendar year for which the employee was offered health coverage.
Use of a safe harbor is not required, and in many cases an employer may charge a higher employee contribution and still have limited exposure to the 4980H(b) penalty. However, a safe harbor provides the employer with certainty. An employer may apply different safe harbors for any reasonable categories of employees. For year-end reporting purposes, use of one of the safe harbor methods will be reported with an indicator code.
Affordability and Flex Credits
Employers who provide cafeteria plan flex credits that can be used to purchase qualified benefits or paid out in cash should carefully consider how this practice impacts affordability. When an employee has the option to take the flex credit as taxable compensation, then the required employee contribution before applying the flex credit will likely determine whether the coverage is affordable. In addition, a flex credit that can be taken as cash may encourage employees to decline the group health plan and shop for Marketplace coverage.
Affordability and Wellness
When employee contributions vary based on whether an employee has satisfied a health standard under a HIPAA wellness program, the employee contribution to be used to determine whether the affordability standard has been met depends on the type of wellness program. If the wellness program targets use of tobacco products, then the lower required employee contribution (i.e. the non-tobacco user contribution) must be affordable. For other wellness programs, the higher required employee contribution (i.e. the required contribution for the employee who does not meet the health standard) must be affordable to avoid penalty exposure.
© PSA Insurance and Financial Services. Group insurance products offered through PSA Financial, Inc. The Benefit Minute provides general information for your reference. Please see your benefits consultant to review your specific situation.