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“Affordability” Indexing at 9.5%

We are sending you a brief update regarding affordability benchmarking and the changes for 2015.  If you have any questions after reviewing this, please contact Heather Reynolds, Vice President and Chief Compliance Officer of FNA.

8/14/2014 - The very familiar 9.5% health reform affordability benchmark is indexed based on formula benchmarks the IRS oversees.  Last week the IRS issued Revenue Procedure 2014-37 to announce indexing that raises the affordability for 2015 plan years to 9.56%.  (See below.  This means plan years starting after December 31, 2014.  Note that this is a miniscule differential which likely complicates compliance more than it offers employers useful relief.)

The affordability factor is based on total household income – an elusive number an employer would never hold.  The IRS responded by issuing special safe harbor rules that enable the employer to measure affordability using:

•    W-2 Form (box one)
•    Rate of pay (hourly income capped at 130 hours per month)
•    Federal Poverty Index (a very low base amount that is not typically helpful for measuring)

Affordability: What we know as of Winter 2013
February 8, 2013
In December 2012 and January 2013, the federal agencies issued important new guidance to shape the affordability provision of next year’s looming employer health coverage mandate. Under those rules, an employer subject to health care reform must offer “affordable” coverage of a minimum value plan to employees. Technically, that means the employee’s share of the self-only premium for the lowest cost coverage cannot exceed 9.5 percent of the employee’s household income.

An employer will not know household income and should not ask for verification of that information. (A variety of state and federal laws arguably protect the employee from having to share such sensitive information.) Employers have been asking how they must comply, given what they cannot know. In response, the IRS initially announced a safe harbor based on an estimate of the employee’s annual W-2 income. That particular safe harbor, as clarified below, is still allowed -- plus two new safe harbors have also been added.

IRS expands affordability safe harbors
Following any of the three outlined approaches shields an employer from the $3,000 penalty. (Note: a separate $2,000, “no offer” penalty applies to any employer who fails to provide adequate health plan coverage to all full-time employees, within a 5% margin for error.)

• W-2 Earnings (Optimal choice for most employers): The employee’s contribution for employee-only coverage must be no more than 9.5% of the employee’s wages from the employer, estimated to be reported in Box 1 of the Form W-2. The new rules clarify that Box 1 income does not include elective deferrals to retirement plans or cafeteria plan amounts. Although this interpretation skews the affordability calculation in the employee's favor, lower-paid workers may not use salary deferral opportunities to the same extent as other workers.

• Rate of Pay: The Rate of Pay safe harbor lets an employer take an hourly worker’s hourly pay rate, multiply the hourly rate by 130 hours, and determine affordability based on that monthly amount. For salaried employees, the monthly salary is used.

• Federal Poverty Level (also possibly called FPL): The Federal Poverty Level safe harbor means employer coverage is affordable if the employee's cost for single coverage does not exceed 9.5% of the federal poverty level for a single individual ($11,170 for 2012; higher in Alaska and Hawaii).

Our first listed option using an estimate of the W-2 earnings is the best affordability safe harbor choice for most employers, followed closely by the second, rate of pay, option. The last option will rarely be useful, because using the federal poverty basement to set the employees’ premium shares results in the employer not shifting an optimal amount of premium expense to higher-paid employees.

Form W–2 safe harbor
Betty works for ABC Company for all of 2014 as a full-time employee earning $25,000 per year, with $100 contributions to the retirement plan (based on the average for the employees at this wage level who do not contribute very much). ABC Company offers Betty health coverage and bases her contributions for coverage on $24,900 estimated annual earnings. Her employer could charge up to $197 per month for single coverage, and it would be considered “affordable.” Some employers may set the employee premiums slightly lower, at $180 per month, for example, to be safe. Other employers may set the monthly employee costs even lower in order to provide a more generous benefit.

As long as the employee contribution for 2014 is less than 9.5% of Betty’s Form W–2 wages for 2014, the coverage offered to Betty is treated as affordable for 2015.

Employees who work less than 12 full months
The IRS uses special rules for its W-2 safe harbor for employees who are not full-time employees for a full calendar year. Under these rules, if an employee works fewer than 12 months of the year, the employer multiplies the estimated W-2 wages for the calendar year by a fraction — the fraction is the number of months when coverage is offered to the employee over the months the employee is employed. For example, Ed will work eight months, and is offered coverage during five of those months (A 90-day waiting period applied.) Ed receives a Form W-2 reflecting wages of $24,000. To adjust the wages, the employer multiplies $24,000 by 5/8, and Ed would have adjusted W-2 wages of $15,000.

Dependents and Affordability
The latest official regulations issued in December and January are very clear. First, eligibility for families of employees is different from what PPACA experts have assumed since 2010. Instead of offering coverage to the employee and all family members, an employer does not need not be that generous. An employer does not have to offer coverage to spouses. Rather, an employer is only required to offer the coverage to children. This clarification means an employer can decide to not offer coverage to spouses, though such a plan is unlikely to be viewed as a very generous benefit. Even an employer that does offer coverage to spouses could limit eligibility to spouses who have no other coverage, or place other restrictions on spouses' eligibility. Second, the coverage offered to the children does not have to be affordable. (This has been a common question, so this clarity is welcomed.) Finally, it has been assumed that if an employer offered affordable coverage to the employee, the family members could still access federal assistance such as tax credits to purchase coverage through an insurance exchange. However, that is not true. Now, the federal government says when an employer offers affordable coverage to the employee, the family members of the employee cannot qualify for any federal tax credits or other assistance. These family members instead could still use the exchange to purchase a policy, but must pay the full amount of the premium for that coverage.

Plan Design Choices
To satisfy affordability while minimizing costs, many employers will take a base and buy up approach. In other words, the employer offers a very basic plan, at the minimum value that will be acceptable to the federal government, basically what has been referred to as a bronze, minimum value or 60/40 plan. Ideally, the plan option will be the lowest possible cost the employer can purchase or design, with a narrow network, perhaps a newer ACO-type model where the provider takes on some of the risk. The employer then offers a buy up plan option, often a more generous 80% PPO.

Although the stripped-down, base plan option would need to be priced for affordability -- only one option must be affordable. As a result, the employer group could continue a richer program option such as a PPO and need not make it affordable. Again, only employee coverage must be affordable.

Most employers will be setting premiums based on income tiers, so perhaps with one premium range applying to people earning between $12,480 and those earning $15,000, then from $15,000 to $18,000 and so on. The premium cannot exceed 9.5% of what an employee/associate is expected to earn that year, estimated at the start of the year. Starting at the lowest cited income, $12,480, the affordable contribution would be $98.80/month. However, to avoid attracting people to a richer plan such as a PPO for approximately the same cost, the employee cost for that existing/richer plan usually will need to be adjusted.

Fundamental Rule: No penalty to employer if it offers affordable coverage even when employee declines
Starting next year, large employers subject to health care reform that offer coverage to full-time employees will face a penalty tax if a full-time employee is enrolled in exchange coverage for which a federal premium tax credit is paid. So, only employees who qualify for a tax credit for their own single coverage might possibly trigger a penalty to the employer.

Because the federal government will NOT provide premium assistance to anyone beyond 400 percent of the FPL, health coverage will not need to be affordable for anyone earning over approximately $46,000 in 2014. In other words, because the $46,000 figure is 400% of federal poverty, having income earned beyond $46,000 will take that person outside of qualification zone for federal assistance. This person and other higher earners would not trigger the $3,000 penalty -- he would not qualify for tax credits. So, employers will not have to make coverage affordable to these workers, though many will provide a solid benefit to attract and retain their services. The federal poverty level is adjusted each year, but this affordability income ceiling offers employers important strategic plan design opportunities.

Impact of safe harbors on employees as individuals and on

The government has clarified that an employee’s total household income is used to measure premium tax credits to individuals who apply for coverage through an exchange. In some cases an employer will use one of the safe harbors to calculate premium affordability, but in light of full household income, some employees could still potentially qualify for tax credit assistance. The employer will not be subject to a $3,000 penalty because the employer acted in good faith using one of the safe harbors, and the individual might still be entitled to federal assistance to pay for exchange health coverage.

Next Steps

A formal study to project expected costs is suggested. The low income populations usually does not elect coverage due to cost, and the percentage that do is often 20% or lower. However, health reform may heighten concern by many workers who hear they will need to elect or pay a penalty. The fear factor of getting in trouble may spur them to elect. To counteract that tendency, many employers are planning to educate their employees about the low individual penalty -- $95 in 2014 as the minimum, going up to the greater of $695 or 2.5% of adjusted income by 2016. Anyone making under approximately $29,000 will likely consider paying the dollar amount penalty. The goal will be to show employees that paying the ”fee“ (really, the penalty) is often somewhat less than spending $110 to $130 or more per month for the premiums.

As 2014 looms ahead, health care reform planning becomes more imperative than ever. Specific actions must be taken, and decisions must be made, to minimize the impact on business and bottom line profits. We invite you to schedule a meeting with your FNA Broker Representative or speak to Heather directly to review your client’s particular circumstances and decide on the optimal financial and compliance strategy.

Helpful Links
Share Responsibility for Employers Regarding Health Coverage; Proposed Rule
Federal Register: Health Insurance Premium Tax Credit
Federal Register: Shared Responsibility Payment for Not Maintaining Minimum Essential Coverage

Heather Reynolds, Vice President Chief Compliance Officer


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