As Chris Kutner explained in his January 4, 2013 post, the Patient Protection and Affordable Care Act of 2010 (“PPACA” or “Obama Care”) requires, beginning in 2014, that employers with 50 or more full-time employees (“large employers”) offer “affordable” health insurance to their employees. Failure to do so will subject the employer to penalties. Recently published IRS proposed regulations provide guidance to employers on these potential penalties.
Is your health coverage affordable?
If the health coverage offered by a large employer is not deemed “affordable” and at least one FTE receives a premium tax credit to purchase coverage on an Exchange, the employer will incur a tax under IRC §4980H. An employer’s health coverage is affordable if the employee’s share of the self-only premium under the lowest-cost plan that provides “minimum value” does not exceed 9.5% of the employee’s household income. An employer, of course, will not know the employee’s household income (and the employee will most likely not know his or her household income until year end). For this reason, the IRS has offered a safe harbor that would allow the employer to use the employee’s current W-2 wages instead of the employee’s household income for purposes of determining affordability of the health coverage.
Determining if your lowest-cost plan offers “minimum value”
An employer’s lowest cost plan will fail to provide “minimum value” if the plan’s share of the total allowed cost of benefits provided under the plan is less than 60% of such costs. This is generally understood to be an actuarial value test. Actuarial value is defined as the percent of costs that a health plan will cover, versus the percentage a beneficiary will have to pay directly. So if a large employer’s health insurance plan has an actuarial value of 55%, the plan would, on average, require its employees to directly pay 45% of health expenses, through co-pays, co-insurance, deductibles, etc. The remaining 55% would be paid by the insurer. Thus, the 55% plan would fail to provide minimum value.