ACA Pay or Play Penalty - Affordability Safe Harbors

7/28/2019 ACA Pay or Play Penalty - Affordability Safe Harbors

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Pay or Play Penalty Affordability Safe Harbors

Beginning in 2014, the Affordable Care Act (ACA) imposes pay or play requirements on large employers. Underthese pay or play requirements, large employers that do not offer health coverage to their full-time employees andtheir dependents, or that offer coverage that is either unaffordable or does not provide minimum value, may besubject to a penalty. This penalty is also referred to as a shared responsibility payment.

On Jan. 2, 2013, the Internal Revenue Service (IRS) publishedproposed regulationsthat provide further guidanceon whether coverage will be considered affordable. The IRS previously announced the Form W-2 safe harbor, whichallows employers to assess affordability for each employee according to the employees Form W-2 wages only (ratherthan household income). The proposed regulations:

Incorporate the Form W-2 safe harbor; and

Establish two additional affordability safe harbors: the rate of pay safe harbor and the federal povertyline safe harbor.

The regulations are not final. However, employers may rely on the proposed regulations until final regulations or otherapplicable guidance is issued.

In addition, on May 3, 2013, the IRS released aproposed ruleon ACAs minimum value and affordabilityrequirements. This proposed rule includes guidance on how health reimbursement arrangements (HRAs) and wellnessprogram incentives are counted in determining the affordability of employer-sponsored coverage.

BACKGROUND

The affordability of any 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 employeesrequired contribution to the plan does not exceed 9.5 percentof the employees household income for the taxableyear. Household income means the modified adjusted gross income of the employee and any members of theemployees family, including a spouse and dependents.

Because employers may be largely unaware of the income levels of their employees family members, they could findit difficult to assess whether the coverage they offer would be considered affordable. To address this issue, the threeaffordability safe harbors provide alternate methods of determining the affordability of their health coverage.

These safe harbors are all optional. An employer may choose to use one or more of these safe harbors for all itsemployees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for allemployees in a category.

Safe Harbor Application

The proposed rules clarify that the affordability safe harbors apply only for purposes of determining whether anemployers coverage satisfies the 9.5 percent affordability test for purposes of the shared responsibility penalty under

Code section 4980H(b). The safe harbors do not affect an employees eligibility for a premium tax credit, which wouldcontinue to be based on the affordability of employer-sponsored coverage relative to an employees householdincome.
https://www.federalregister.gov/articles/2013/01/02/2012-31269/shared-responsibility-for-employers-regarding-health-coveragehttps://www.federalregister.gov/articles/2013/01/02/2012-31269/shared-responsibility-for-employers-regarding-health-coveragehttps://www.federalregister.gov/articles/2013/01/02/2012-31269/shared-responsibility-for-employers-regarding-health-coveragehttp://www.gpo.gov/fdsys/pkg/FR-2013-05-03/pdf/2013-10463.pdfhttp://www.gpo.gov/fdsys/pkg/FR-2013-05-03/pdf/2013-10463.pdfhttp://www.gpo.gov/fdsys/pkg/FR-2013-05-03/pdf/2013-10463.pdfhttp://www.gpo.gov/fdsys/pkg/FR-2013-05-03/pdf/2013-10463.pdfhttps://www.federalregister.gov/articles/2013/01/02/2012-31269/shared-responsibility-for-employers-regarding-health-coverage


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This Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readersshould contact legal counsel for legal advice.

Design 2013 Zywave, Inc. All rights reserved. BK 1/13

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This means that, in some instances, an employers offer of coverage to an employee could be considered affordable(based on W-2 wages) for purposes of determining whether the employer is subject to a penalty and the same offer ofcoverage could be treated as unaffordable (based on household income) for purposes of determining whether theemployee is eligible for a premium tax credit.

FORM W-2 SAFE HARBOR

Under the Form W-2 safe harbor, an employer may determine the affordability of its health coverage by referenceonly to an employees wages from that employer, instead of by reference to the employees household income.Wages for this purpose is the amount that is required to be reported in Box 1 of the employees Form W-2. The

proposed rules emphasize that wages for the purposes of the Form W-2 safe harbor does not take into accountanyelective deferrals to a 401(k), 403(b) or cafeteria plan.

Eligibility for the Form W-2 Safe Harbor

To be eligible for the Form W-2 safe harbor, an employer must:

Offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverageunder an employer-sponsored plan; and

Ensure that the employee portion of the self-only premium for the employers lowest cost coverage thatprovides minimum value (the employee contribution) does not exceed 9.5 percent of the employees W-2wages.

If the employer satisfies both of these requirements for a particular employee, along with any other conditions for thesafe harbor, the employer will not be subject to a penalty for providing unaffordable coverage with respect to thatemployee. This is the case even if the employee receives a premium tax credit or cost sharing reduction to purchasecoverage through a health insurance exchange.

Timing of the Form W-2 Safe Harbor

Whether the safe harbor applies will be determined after the end of the calendar year and on an employee-by-employee basis, taking into account W-2 wages and employee contributions. However, an employer could also use theForm W-2 safe harbor prospectively, at the beginning of the year, by structuring its plan and operations to set thecontribution for each employee at a level that would not exceed 9.5 percent of that employees W-2 wages for that

year. Employers may also make adjustments for pay periods so that the employee contribution does not exceed 9.5

percent of the employees W-2 wages.

Form W-2 Safe Harbor for New Employees

For an employee who was not a full-time employee for the entire calendar year, the Form W-2 safe harbor is appliedby adjusting the employees Form W-2 wages to reflect the period when the employee was offered coverage. Theadjusted wages will then be compared to the employee share of the premium during that period.

Specifically, the amount of the employees compensation for purposes of the Form W-2 safe harbor is determined bymultiplying the wages for the calendar year by a fraction equal to the months the employee was employed. Thatadjusted wage amount is then compared to the employee share of the premium for the months that coverage wasoffered to determine whether the Form W-2 safe harbor was satisfied for that employee.


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This Legislative Brief is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readersshould contact legal counsel for legal advice.

Design 2013 Zywave, Inc. All rights reserved. BK 1/13

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Wellness Program Incentives

The proposed rule also contains 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. Thismeans the affordability of a plan that charges a higher initial premium for tobacco users will be determined based onthe premium charged to non-tobacco users, or tobacco users who complete the related wellness program, such asattending smoking cessation classes.

Transition relief is provided in the proposed rule for plan years beginning before Jan. 1, 2015. Under this relief, if an

employee receives a premium tax credit because an employer-sponsored health plan is unaffordable or does notprovide minimum value, but the employer coverage would have been affordable or provided minimum value had theemployee satisfied the requirements of a nondiscriminatory wellness program that was in effect on May 3, 2013, theemployer will notbe subject to the employer mandate penalty.

The transition relief applies for rewards expressed as either a dollar amount or a fraction of the total requiredemployee premium contribution. Also, any required employee contribution to premium determined based uponassumed satisfaction of the requirements of a wellness program under this transition relief may be applied to the useof an affordability safe harbor.

Source: Internal Revenue Service

ACA Pay or Play Penalty - Affordability Safe Harbors

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