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A reminder to employers that the definition of ‘affordable’ can change
On July 24, 2014, the IRS released Revenue Procedure 2014-37 to index the Affordable Care Act’s (ACA) affordability percentages for 2015 under the employer “shared responsibility” coverage mandate, also referred to as “play or pay.” The IRS also adjusted upward the income level under which employees are exempt from the ACA’s individual mandate.
Under the new guidance, for plan years beginning in 2015 an applicable large employer’s health coverage will be considered affordable under the play or pay rules if the employee’s required contribution to the plan does not exceed 9.56 percent of the employee’s household income for the year, up from 9.5 percent.
Update: Subsequently, in Revenue Procedure 2014-62, issued in December 2014, the IRS announced that the afforability percentage for plan year 2016 will rise to 9.66 percent.
[Note: While this article uses the adjusted 9.56 percent household income affordability threshold and cites several legal sources who advise doing so, others advise that the increase, beginning in 2015, in the 9.5 percent threshold does not impact the affordability safe harbors under section 4980H of the Internal Revenue Code. For another dissenting legal view, see the box at the end of this article.]
The employer mandate was originally meant to take effect in 2014 but was subsequently delayed until 2015 or 2016, depending on employer size, as explained below.
Because an employer generally will not know an employee’s household income, the IRS created three affordability safe harbors that employers may use to determine affordability based on information that is available to them. For plan years beginning in 2015:
• Employee's required premium co-share for the lowest-cost, self-only coverage that provides minimum value is not greater than 9.56 percent of an employee's W-2 taxable (Box 1) income. The cost of dependent coverage is not calculated in the determination of whether the employer is offering affordable coverage.
• Employee’s required premium co-share for the lowest-cost, self-only coverage that provides minimum value is not greater than 9.56 percent of rate of pay as of the first day of the coverage period (generally the first day of the plan year).
• Employee’s required premium co-share for the lowest-cost, self-only coverage that provides minimum value is not greater than 9.56 percent of the federal poverty level for a single individual.
For more about the IRS affordability safe harbors, see the SHRM Online article What's ‘Affordable’ Coverage Under Health Care Reform?
Applicable large employers (ALEs) that do not offer affordable health coverage to their full-time employees may be subject to penalties, beginning in 2015. “ALEs should review whether their health plans comply with the increased percentage,” advised an alert from BB&T Insurance Services.
“This change stems from the requirement that the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year, with each subsequent plan year being adjust accordingly,” explained Keith R. McMurdy, a partner at Fox Rothschild LLP in New York, in a posting on the firm’s Employee Benefits Legal Blog. He added:
Admittedly, this is hardly a monumental change for 2015, but it does serve as a reminder to employers that the definition of “affordable” can change. So a key component of building a solid ACA compliance plan includes checking to see if the various limits and percentages have changed prior to a plan year. Don’t assume things remain static because the act clearly provides for change.
“The ACA’s statutory language requires the IRS to adjust this percentage (starting in 2015) to reflect any excess in (1) the rate of health insurance premium growth, over (2) the rate of income growth (with 2013 used as the base year for both measurements). And in Revenue Procedure 2014-37, the IRS has done exactly that,” concurs an alert from law firm Spencer Fane. “Employers that have attempted to educate their employees on either the individual mandate or the federal premium subsidies should be aware of these adjusted percentages when issuing any new educational materials.”
Starting Jan. 1, 2015, employers with the equivalent of 100 or more full-time employees must offer “affordable” care that meets minimum-value specifications (as determined by minimum-value calculations) to 70 percent of their full-time employees, to fulfill the employer mandate. By 2016, large employers will need to provide coverage to at least 95 percent of their full-time workers.
Starting Jan. 1, 2016, employers with the equivalent of 50 to 99 full-time employees may face penalties if they do not provide "affordable" care to at least 95 percent of their full-time employees as specified.
These deadlines were put in place in February 2014, when the Treasury Department issued its most recent mandate delay via a new final rule and related fact sheet and Q&A on Employer Shared Responsibility Under the Affordable Care Act.
Beginning in 2014, the ACA also required most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty under the individual coverage mandate.
Individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption, under the ACA coverage is affordable for an employee if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income, to be adjusted annually after 2014. For family members, coverage is affordable if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income, to be adjusted annually after 2014.
For plan years beginning in 2015, Revenue Procedure 2014-37 increases these percentages from 8 percent to 8.05 percent.
Questions Raised About Affordability Rate Change
Illustrating that nothing is ever easy when it comes to deciphering how to comply with the massively complex Affordable Care Act and that legal experts can be unsure what to advise, attorneys at Proskauer Rose LLP, in an August 2014 posting on the firm’s ERISA Practice Center Blog, have raised questions about whether anything has actually changed.
“It has been widely reported that the IRS has increased the affordability percentage in all cases from 9.5 percent to 9.56 percent. This is not necessarily true,” the attorneys wrote. They explained:
The reason this is not true is that the IRS regulations on affordability have “hard-wired” the 9.5 percent standard into those regulations; the regulations do not cross-reference to the statutory reference for affordability. As the IRS continues to index the affordability measure for household income over time, as is required by the ACA, a concomitant change to the percentage established in the regulations will be required or else these two percentages will very quickly become dramatically out-of-sync.
Some type of announcement from the IRS increasing the regulatory 9.5 percent threshold to the statutory 9.56 percent threshold for the applicable safe harbors would be welcome. In the meantime, employers planning on complying with the regulatory safe harbor rules should cap premiums based on the literal terms of those regulations.
Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.
New Rates for “Affordable Coverage” for 2015: Rev. Proc.
2014-37, Fox Rothschild LLP, August 2014
When Does 9.5% Equal 9.56%?, Spencer Fane Britt &
Browne LLP, August 2014
IRS Increases 9.5% Affordability Threshold—Or Did It?, Proskauer Rose LLP, August 2014
IRS Increases Affordability Percentage Under Employer Mandate for 2015, BB&T Insurance Services Legislative Alert, July 2014
Health Care Reform: Get Ready to Report, HR Magazine, August 2014
IRS Issues Draft Forms for 2015 ACA Reporting, SHRM Online Benefits Discipline, July 2014
What's ‘Affordable’ Coverage Under Health Care Reform?, SHRM Online Benefits Discipline, February 2014, updated August 2014
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