For plan years beginning in 2015, the health coverage affordability percentage under the ACA’s pay or play rules will generally increase slightly, from 9.5 percent to 9.56 percent.
Several key reforms under the Affordable Care Act (ACA) measure the affordability of employer-sponsored health coverage. The affordability of an employer’s plan may be assessed in the following three contexts:
- The shared responsibility penalty for applicable large employers (also known as the pay or play rules or employer mandate)
- An exemption from the tax penalty imposed on individuals who fail to obtain health coverage (also known as the individual mandate)
- The premium tax credit for low-income individuals to purchase health coverage through an Exchange.
Employer Mandate
Starting in 2015, the ACA requires applicable large employers to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. These rules are also known as the employer mandate or the “pay or play” rules.
The pay or play rules apply only to applicable large employers (ALEs), which are employers that have, on average, at least 50 full-time employees (including full-time equivalents) during the preceding calendar year.
Many ALEs will be subject to the pay or play rules starting in 2015. However, ALEs with fewer than 100 full-time employees may have an additional year, until 2016, to comply with the employer mandate.
Affordability Determination
The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty.
The pay or play rules generally determine affordability of employer-sponsored coverage by reference to the rules for determining premium tax credit eligibility. Therefore, for 2014, employer-sponsored coverage is considered affordable under the pay or play rules if the employee’s required contribution for self-only coverage does not exceed 9.5 percent of the employee’s household income for the tax year.
This required contribution percentage is to be adjusted annually after 2014. As noted above, Rev. Proc. 2014-37 adjusts this required contribution percentage for plan years beginning in 2015 to 9.56 percent.
The affordability test applies only to the portion of the annual premiums for self-only coverage, and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.
Affordability Safe Harbors
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.
The affordability safe harbors are all optional. An employer may choose to use one or more of the affordability safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.
The affordability safe harbors are:
- The Form W-2 safe harbor (affordability determined based on Form W-2 wages from that employer)
- The rate of pay safe harbor (affordability determined based on an employee’s rate of pay)
- The federal poverty line (FPL) safe harbor (affordability determined based on FPL for a single individual)
The general employer mandate affordability rules determine affordability by reference to the rules for determining premium tax credit eligibility. However, these affordability safe harbors do not reference the premium tax credit eligibility rules. Instead, the safe harbor rules specifically use 9.5 percent as the required contribution.
Thus, based on a literal reading of the affordability safe harbor rules, applicable large employers using any of the affordability safe harbors in 2015 will measure their plan’s affordability using a required contribution of 9.5 percent (instead of 9.56 percent).