Under the Affordable Care Act health care reform law, employers with 50 or more full-time employees during the previous year will pay a penalty if just one employee enrolls in coverage through the individual exchange and receives a premium tax credit because group coverage doesn’t cover minimum essential benefits and his or her contribution isn’t affordable because it exceeds 9.5% of his or her household income.
Problem: You usually don’t know employees’ household income. To remedy this, the IRS is proposing an employer affordability safe harbor, which will be included in future regulations. (Notice 2011-73, IRB 2011-40)
Proposed safe harbor. Under the safe harbor, you wouldn’t pay the penalty if an employee receives a premium tax credit, if you offered full-time employees and their dependents a chance to enroll in a plan that provided minimum essential benefits, and the employee’s contribution for self-only coverage for the lowest cost plan didn’t exceed 9.5% of his or her W-2, Box 1 wages.
The safe harbor would apply at the end of the calendar year, when Box 1 wages are determined, and on an employee-by-employee basis. So, for example, you would determine whether you could claim safe-harbor protection for 2014 for a particular employee by looking at his or her 2014 Box 1 wages and comparing 9.5% of that amount to the employee’s contribution for self-only coverage for the lowest cost plan.
LOOKING AHEAD: You could also use the safe harbor at the beginning of a year by setting employee contributions at a level that wouldn’t exceed 9.5% of any employee’s income. The IRS is contemplating allowing you to make reasonable and necessary pay-period adjustments so that employees’ contributions never exceed 9.5% of their Box 1 income.
Care to comment? The IRS is soliciting comments on whether or how wages and employees’ contributions would be determined for employees who are hired midyear or who move between full-time and part-time status, or when the plan isn’t a calendar-year plan. It’s also interested in knowing whether there are other ways to determine whether coverage is affordable.
Comments are due to the IRS by Dec. 13, 2011. Email your comments to Notice.firstname.lastname@example.org. Be sure to include the phrase "Notice 2011-73" in the subject line. Reminder: Be nice. Comments will be available for public inspection.