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EmploymentUpdates and News

February 2013

“Affordability” Under the Patient Protection and Affordable Care Act

By Kristin Blake, Esq.

Beginning January 2014, employers with 50 or more full-time or “full-time equivalent” employees (otherwise referred to as “applicable large employers”) will be subject to the Employer Shared Responsibility provisions of section 4980H of the Internal Revenue Code (added to the Code by the Patient Protection and Affordable Care Act (“PPACA”)).

Generally, an employer incurs liability (penalty) if the employer fails to provide either “affordable” health coverage, or health coverage of “minimum value” to one or more of its full-time employees (and their dependents) who have been certified as having received a premium tax credit or cost sharing reduction. So long as the coverage offered meets the affordability criteria of the Act and no full-time employee has received a premium tax credit, there is no liability.

 

How are “affordability” and “minimum value” measured under the PPACA?


Guidelines

The IRS issued guidelines on how to meet the “affordability” and “minimum value” criteria. (26 CFR Parts 1, 54, and 301 [REG-138006-12])

Under section 4980H(b), an applicable large employer member may be subject to an assessable payment if its offer of Minimum Essential Coverage (MEC) under an eligible employer-sponsored plan is unaffordable (within the meaning of section 36B(c)(2)(C)(i)) of the ACA) or does not provide minimum value (within the meaning of section 36B(c)(2)(C)(ii)).


Minimum Value

If the coverage offered by an applicable large employer fails to provide minimum value, an employee may be eligible to receive a premium tax credit. Under section 36B(c)(2)(C)(ii), a plan fails to provide minimum value if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of those costs. Section 1302(d)(2)(C) of the PPACA sets forth the rules for calculating the percentage of total allowed costs of benefits provided under a group health plan or health insurance plan.

On November 26, 2012, the Department of Health and Human Services (HHS) issued proposed regulations providing guidance on methodologies for determining minimum value (77 FR 70644). A minimum value calculator will be made available by the IRS and the Department of Health and Human Services (HHS). Employers can input certain information about the plan, such as deductibles and co-pays, into the calculator and get a determination as to whether the plan provides minimum value by covering at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan.


Affordability

For purposes of eligibility for the premium tax credit, coverage for an employee under an employer-sponsored plan is “affordable” if the employee's required contribution for self-only coverage does not exceed 9.5% of the employee's household income for the taxable year. Since employers generally will not know their employees’ household incomes, the proposed regulations set forth an affordability safe harbor that allows the employer to use the wages paid to the employee as reported in Box 1 of the W-2 form.

As implementation of the PPACA draws near, additional tools and guidance will be forthcoming from the HHS and the Treasury Department. We will be monitoring all relevant sources for the latest information and updates as they become available.

 

Klinedinst Employment Law Update

The opinions expressed in this employment update are general in nature, and are not meant to provide specific legal advice. For more information, please contact a Klinedinst attorney. No attorney/client privilege is created or assumed by reading this newsletter.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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