Affordability
Under the ACA, eligible employer-sponsored coverage is affordable only if an employee’s required contribution for self-only coverage does not exceed 9.5 percent of household income. Although the rule measures affordability based on household income, employers may find it difficult to determine an employee's household income because they generally will not know the income levels of their employees' family members. As a result, the IRS established three safe harbors for employers to use, which measure affordability based on the employee's W-2 wages, the employee's rate of pay or the federal poverty level for a single individual.
The proposed regulation includes special rules for determining how HRAs and wellness program incentives are counted in determining the affordability of eligible employer-sponsored coverage. The proposed rule provides that amounts made newly available under an HRA that is integrated with an eligible employer-sponsored plan for the current plan year are taken into account only in determining affordability if the employee may either:
- Use the amounts only for premiums; or
- Choose to use the amounts for either premiums or cost-sharing.
Treating amounts that may be used either for premiums or cost-sharing only toward affordability prevents double counting the HRA amounts when assessing MV and affordability of eligible employer-sponsored coverage.
The proposed rules also contain clarification on affordability when premiums may be affected by wellness programs. Under the proposal, the affordability of an employer-sponsored plan is determined by assuming that each employee fails to satisfy the wellness program's requirements, unless the wellness program is related to tobacco use. This means the affordability of a plan that charges a higher initial premium for tobacco users will be determined based on the premium charged to non-tobacco users, or tobacco users who complete the related wellness program, such as attending smoking cessation classes.
Transition relief is provided in the proposed rules for plan years beginning before January 1, 2015. Under this relief, if an employee receives a premium tax credit because an employer-sponsored health plan is unaffordable or does not provide minimum value, but the employer coverage would have been affordable or provided minimum value had the employee satisfied the requirements of a nondiscriminatory wellness program that was in effect on May 3, 2013, the employer will not be subject to the employer mandate penalty. The transition relief applies for rewards expressed as either a dollar amount or a fraction of the total required employee premium contribution.
The following table provides an overview of the three ACA reforms that measure whether an employer’s health coverage is affordable.
| ACA Mandate | Summary | Affordability Measure for Employees | Affordability Measure for Family Members |
| Employer Shared Responsibility Penalty | Large employers that do not offer health coverage to their full-time employees and dependents, or offer coverage that is either unaffordable or does not provide minimum value, may be subject to a penalty. | Coverage is affordable if the employee portion of the premium for the lowest-cost, self-only coverage that provides minimum value does not exceed 9.5 percent of an employee’s W-2 wages, rate-of-pay income or the federal poverty level for a single individual. | Coverage is affordable if the employee portion of the premium for the lowest-cost, self-only coverage that provides minimum value does not exceed 9.5 percent of an employee’s W-2 wages, rate-of-pay income or the federal poverty level for a single individual. The cost of family coverage is not taken into account. |
| Premium Tax Credit | The premium tax credit helps eligible individuals and families purchase health insurance through an ACA Exchange. Employees (and their family members) who are eligible for coverage under an employer-sponsored plan that is affordable and provides minimum value are not eligible for ACA’s premium tax credit. |
Coverage is affordable if the employee’s cost for self-only coverage does not exceed 9.5 percent of household income. | Coverage is affordable if the employee’s cost for self-only coverage does not exceed 9.5 percent of household income. The cost of family coverage is not taken into account. |
| Individual Mandate | Most individuals must obtain health coverage for themselves and their family members or pay a penalty. However, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. | Coverage is affordable if the required contribution for the lowest-cost, self-only coverage does not exceed eight percent of household income. | Coverage is affordable if the required contribution for the lowest-cost family coverage does not exceed eight percent of household income. |
Employer Shared Responsibility Penalty (Delayed Until 2015)
Under ACA’s “pay or play” requirements, large employers that do not offer health coverage to their full-time employees and dependents, or offer coverage that is either unaffordable or does not provide minimum value, may be subject to a penalty.
A “large employer” for purposes of ACA’s shared responsibility penalty is one with 50 or more full-time employees, or an equivalent combination of full-time and part-time employees.
Affordability Determination
The affordability of health coverage offered by a large employer is a key point in determining whether the employer will be subject to a shared responsibility penalty.
The coverage is considered affordable if the employee’s portion of the self-only premium for the employer’s lowest- cost coverage that provides minimum value does not exceed 9.5 percent of the employee’s household income for the tax year.
This determination applies regardless of whether the employee is eligible for another level of health plan coverage, such as family coverage. Thus, the cost of family coverage is not taken into account to determine whether an employer’s health plan is affordable for purposes of the shared responsibility penalty.
Safe Harbors
Because employers may be largely unaware of the income levels of their employees’ family members, they could find it difficult to assess whether the coverage they offer would be considered affordable. To address this issue, a proposed rule on ACA’s shared responsibility penalty includes three affordability safe harbors: Form W-2 safe harbor, rate- of-pay safe harbor and federal poverty line (FPL) safe harbor.
These safe harbors allow an employer to determine the affordability of its health coverage without knowing an employee’s household income, as follows:
- Form W-2 – Under the Form W-2 safe harbor, an employer compares the cost of self-only health coverage to an employee’s wages from that employer that are required to be reported in Box 1 of the employee’s Form W-2 to determine whether the cost exceeds 9.5 percent of income.
- Rate-of-Pay – Under the rate-of-pay safe harbor, affordability is determined by comparing the cost of self-only coverage to an employee’s rate of pay. For salaried employees, the employer would use the employee’s monthly salary to determine affordability. For hourly employees, the employer would multiply the employee’s hourly rate of pay by 130 hours per month and determine affordability based on the resulting monthly wage amount.
- FPL – The FPL safe harbor measures affordability based on the FPL for a single individual.
Premium Tax Credit
ACA created the premium tax credit to help eligible individuals and families purchase health insurance through an ACA Exchange. By reducing a taxpayer’s out-of-pocket premium costs, the credit is designed to make coverage through an Exchange more affordable.
Eligibility for Tax Credit
To be eligible for the premium tax credit, a taxpayer:
- Must have household income for the year between 100 percent and 400 percent of the FPL for the taxpayer’s family size;
- May not be claimed as a tax dependent of another taxpayer; and
- Must file a joint return, if married.
In addition, to receive the premium assistance, a taxpayer must enroll in one or more qualified health plans through an Exchange.
Also, the taxpayer cannot be eligible for minimum essential coverage (such as coverage under a government-sponsored program or an eligible employer-sponsored plan). Employees who may enroll in an employer-sponsored plan, and individuals who may enroll in the plan because of a relationship with an employee, are generally considered eligible for minimum essential coverage if the plan is affordable and provides minimum value.
Affordability Determination
Employees (and their family members) who are eligible for coverage under an employer-sponsored plan that is affordable and provides minimum value are not eligible for ACA’s premium tax credit.
To determine an employee’s eligibility for a tax credit, ACA provides that employer-sponsored coverage is considered affordable if the employee’s cost for self-only coverage does not exceed 9.5 percent of the employee’s household income for the tax year.
On February 1, 2013, the IRS released a final rule to confirm that an employer-sponsored plan is affordable for family members if the portion of the annual premium the employee must pay for self-only coverage does not exceed 9.5 percent of the taxpayer’s household income for the tax year. Thus, the affordability determination for families is based on the cost of self-only coverage, not family coverage.
Individual Mandate
Beginning in 2014, ACA requires most individuals to obtain health coverage for themselves and their family members or pay a penalty. Because this provision has the effect of “requiring” individuals to have coverage, it is often referred to as the “individual mandate.”
Minimum Essential Coverage
The penalty will be assessed against an individual for any month during which he or she does not maintain minimum essential coverage, beginning in 2014 (unless an exemption applies). The
requirement to maintain minimum essential coverage applies to individuals of all ages, including children.
Minimum essential coverage includes coverage under:
- A government-sponsored program, such as coverage under the Medicare or Medicaid programs, CHIP, TRICARE and certain types of veterans health coverage;
- An eligible employer-sponsored plan (including COBRA and retiree coverage);
- A health plan purchased in the individual market; or
- A grandfathered health plan.
Minimum essential coverage does not include specialized coverage, such as coverage only for vision care or dental care, workers’ compensation, disability policies, or coverage only for a specific disease or condition.
Under the ACA, minimum essential coverage also includes any additional types of coverage that are designated by the Department of Health and Human Services (HHS) or when the sponsor of the coverage follows a process to be recognized as minimum essential coverage.
Affordability Exemption
ACA includes a number of exemptions from the requirement to obtain minimum essential coverage. Under one of these exemptions, individuals who lack access to affordable minimum essential coverage are not subject to the individual mandate penalty. This exemption avoids making an individual pay a tax penalty if his or her only health coverage option is unaffordable.
On February 1, 2013, the Internal Revenue Service (IRS) issued a proposed rule on the individual mandate’s affordability exemption. The proposed rule would implement the following affordability measures for employees and family members:
- Coverage is unaffordable to an employee who is eligible to purchase coverage through his or her employer if the required contribution for the lowest-cost, self-only coverage would be more than eight percent of household income.
- For family members who are eligible to purchase coverage through an employer-sponsored plan, coverage is unaffordable if the required contribution for the lowest-cost, family coverage would exceed eight percent of household income.
Thus, unlike the employer shared responsibility penalty and the premium tax credit, the individual mandate’s measure of affordability for family members takes into account the cost of family coverage.
Under the individual mandate’s exemption rules, the required contribution for self-only coverage under an employer-sponsored plan may cost less than eight percent of household income, while the required contribution for family coverage under the same employer plan may cost more than eight percent of household income. In this case, the employee is not exempt from ACA’s individual mandate, while the employee’s spouse and other dependents would be exempt.
