How to know if a health plan meets affordability requirements

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Affordability is the key to the Affordable Care Act, but figuring out what that means to employers can often be a pain. While employers may not deliberately make healthcare “unaffordable,” sometimes they’re simply unaware of the exact parameters that define affordability, how they can change from employee to employee, or how to prove they have met them. Miss these important points, however, and an employer could face fines of up to $3,000 per employee for offering unaffordable healthcare.

Despite the Trump administration’s insistence that it will repeal and replace the Affordable Care Act, the 2016 reporting season is scheduled to proceed as planned. The reporting season will begin before the President-elect even takes office, and any legislation brought forth after that will take time to pass after he is sworn in. Because of this, it’s important to keep everything on track — including choosing what safe harbors best fit each business situation. Don’t let the election divert your attention from helping employers provide accurate, affordable results.

Also see:30 people to watch in employee benefits in 2017.”

So how is affordability determined?

“Affordability” is achieved if the lowest-cost self-only coverage option available to employees does not exceed 9.66% (adjusted annually) of any one of the three safe harbors the IRS has put in place for employers. Each of these safe harbors comes with its own strengths that may appeal to different business models:

W-2 affordability safe harbor
Using the W-2 Affordability Safe Harbor, an advisor compares 9.66% of an employee’s Box 1 W-2 wages to the employee-required contribution to the lowest-cost self-only coverage option offered to the employee. If the required contribution does not exceed 9.66% of the W-2 wages, coverage is affordable, thus immunizing the employer from a potential penalty.

If a company’s employees are mainly full-time workers with regular hours and pay, it may be smart to suggest the W-2 as a good option for determining the affordability of a company’s healthcare plan.

Rate of pay affordability safe harbor
To apply the rate of pay safe harbor, start by identifying the hourly rate of pay for each individual employee, and multiply that amount by 130 hours (statutorily set) for the month, regardless of the actual number of hours worked by the employee. Then determine whether 9.66% of that monthly amount is more or less than the required contribution to the lowest-cost self-only coverage option. If the required contribution does not exceed 9.66% of the monthly amount, coverage is affordable, again immunizing the employer from potential penalties.

This safe harbor allows affordability to be calculated for each individual employee, or calculated for just the lowest-earning employee and then applied in a blanket fail-safe for the rest of a company’s workers.

Federal poverty level safe harbor
The last way to determine affordability is to base it on the federal poverty level safe harbor. This means taking the annual federal poverty amount for 100% of an individual’s income, then multiplying that amount by 9.66%, and dividing it by 12 to figure out affordability for each month. This amount is then compared to the required contribution to the lowest-cost self-only coverage option. If the required contribution does not exceed 9.66% of the federal poverty line amount, coverage is affordable, providing the final method for immunizing the employer from potential penalties.

Which is best to use?
An employer only needs to meet one safe harbor to prove a plan is affordable; if a W-2 form can prove a plan is less than 9.66% of an employee’s income, it can be higher than 9.66% of the federal poverty rate and still be in the clear. However, it’s important to advise employers to use some safe harbor, as they act as a line of defense in the case of an audit, and can save a company from huge penalties in the long run.

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