The Internal Revenue Service (IRS) recently released Revenue Procedure 2017-36 which provides indexing adjustments for certain provisions under the Patient Protection and Affordable Care Act (ACA/Obamacare). Of interest to employers is the index adjustment of the contribution percentage used for purposes of determining affordability under the employer shared responsibility (pay or play) mandate. Employers looking to avoid pay or play penalties will need this information to assist in the decision-making process relative to plan designs and employer funding.
Background on Indexing Adjustments
In order to avoid pay or play penalties, applicable large employer (ALE) members must offer full-time employees minimum essential coverage (MEC) that is both affordable and provides minimum value (i.e., actuarial value of at least 60%). Under applicable rules, health care coverage is affordable if the employee’s required contribution for the lowest cost self-only option offered by the employer is 9.5% (as adjusted annually) or less of the employee’s household income. The statute defines “household income” as the modified adjusted gross income of the taxpayer and the members of the taxpayer’s family, and modified adjusted gross income is defined as adjusted gross income plus certain types of income that would otherwise be excluded from the taxpayer’s income (i.e., foreign earned income and housing costs, tax exempt interest, and the excludable portion of the taxpayer’s social security income).
The IRS did not address the household income standard in its employer shared responsibility regulations.
The IRS did not address the household income standard in its employer shared responsibility regulations. Instead, the IRS established a choice of three safe harbors that employers could use to demonstrate compliance with the affordability standard, all of which limit the determination of affordability to employee self-only coverage. Those safe harbor affordability standards include the Form W-2 Safe Harbor (based on the employee’s W-2, Box 1 reported wages for that year), the Rate of Pay Safe Harbor (based on an employee’s hourly rate times 130 hours per calendar month), and the Federal Poverty Line Safe Harbor (based on the annual federal poverty line for a single individual divided by 12).
The provision in the ACA/Obamacare statute that established 9.5% of an employee’s household income as the general affordability standard also provided for indexing (adjustments) of that standard beginning in 2015. The annual adjustments, prior to 2018, are as follows:
Affordability percentage for 2018
For purposes of the employer shared responsibility mandate, the required contribution percentage has decreased for 2018 to 9.56% (from 9.69% in 2017). This means that if an employee’s share of the premium (in 2018) for the lowest cost self-only option offered by the employer is more than 9.56% of his or her household income (or the applicable standard if using one of the affordability safe harbors), the coverage is not considered affordable for that employee and the ALE member may be liable for a penalty if that employee obtains a premium tax credit for health coverage purchased through the public exchange.
So, unless the employer shared responsibility mandate (or at least the related penalties) is repealed, employers may need to reduce employee contributions (or the relative share of plan cost reflected in employee contributions) in 2018 to maintain “affordable” coverage under the ACA/Obamacare.
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