Employer mandate affordability

What is the employer mandate?

Beginning in 2014, certain large employers may be subject to a penalty tax for failing to offer minimum essential health care coverage for all full–time employees (and dependents) or offering eligible employer–sponsored coverage that is not "affordable" or does not offer "minimum value."

The penalty tax would be assessed if any full–time employee receives a premium tax credit for health insurance purchased through a health insurance exchange.

How does an employer know whether the coverage it offers is affordable?

If an employee’s share of the premium for employer provided coverage would cost the employee more than 9.5 percent of that employee’s annual household income, the coverage is not considered affordable for that employee. If an employer offers multiple 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 three affordability safe harbors set forth in the proposed regulations: the W–2 safe harbor, the rate–of–pay safe harbor and the federal poverty level safe harbor. Under the safe harbors, an employer can avoid a payment if the cost of coverage to the employee would not exceed 9.5 percent of the employee’s income or if the coverage satisfies either of the two design–based affordability safe harbors.

The W–2 safe harbor was formalized in a previous IRS notice and will remain in effect until at least Jan. 1, 2015. The other two safe harbors are not yet formalized.

An applicable large employer may use one or more the safe harbors only if the employer offers its full–time employees the opportunity to enroll in minimum essential coverage and it provides minimum value for self–only coverage.

W–2 safe harbor

To qualify for this safe harbor, the employee’s required contribution must remain a consistent amount or a consistent percentage through the entire year (or for non–calendar year plans, the entire portion of each plan year during the calendar year) so that an employer is not permitted to make discretionary adjustments to the employee contribution during a pay period. Application of the W–2 safe harbor wouldn’t be determined until after the end of the calendar year and would be on an employee–by–employee basis based on the employee’s annual W–2 wages.

Rate of pay safe harbor

An employer can compare the employee’s monthly contribution amount to projected monthly income (based on the rate of pay at the beginning of the plan year). Unlike the W–2 safe harbor, the rate–of–pay safe harbor is easy to apply prospectively and avoids the need to analyze each employee’s W–2 at the end of the year. An employer may use this safe harbor only if the employer does not reduce the hourly wages of hourly employees or the monthly wages of salaried employees during the year. If the rate of pay increases during the year, the employer uses the lowest rate of pay for the year.

Federal poverty line safe harbor

Individuals with income below 100 percent of the federal poverty level are not eligible for a tax credit. Since the employer’s pay–or–play liability is predicated on an employee receiving a premium tax credit, an employee with income below 100 percent of the federal poverty level cannot trigger the liability for the employer. Therefore, it’s irrelevant whether coverage is affordable to those employees.