What is “Affordable” Health Care Coverage?
We’ve answered many complex questions on the Affordable Care Act in our webinars and Briefings, but this week I was presented with a question that seems much simpler on its surface. A person who attended our latest webinar asked me, “What does ‘affordability’ mean?”
Well, it all depends on who we’re talking to. You might say that you can afford a VW Beetle, sharing a two-bedroom apartment with a roommate and a high-deductible medical plan. Or you might say that you are managing monthly payments on a Lexus and a 4-bedroom house in the suburbs, and enrolled in an HMO. Affordability is relative for most of us.
But not if you’re talking to the IRS. Under the Affordable Care Act (ACA), “affordable health coverage” is defined as:
- meeting minimum coverage requirements (Minimum Essential Coverage),
- minimum value requirements (covers an actuarial value of at least 60% of the plan’s costs, including out of pocket payments), AND
- costs no more than 9.5% of a family’s Household Income for single coverage.
Your household income is not an easy thing to pinpoint. It’s not your wage rate or your salary, as that doesn’t necessarily equal your actual income. Other family members may contribute to the household. Various deductions or adjustments may apply. Your household income will turn out to be a unique number known only to you and the IRS.
Question: So how are employers supposed to know whether the coverage they are offering is “affordable” without access to your tax returns?
Answer: There are “Safe Harbors” provided in the law. Instead of having to guess your household income, the employer can use one of the three following approved methods of testing the affordability of their coverage:
- Form W-2 Safe Harbor: If the employee cost of the lowest-cost, single-only health plan is 9.5% or less of box 1 of IRS Form W-2, there is no employer tax penalty
- Rate of Pay Safe Harbor: Monthly deduction from pay does not exceed 9.5% of 130 times the hourly rate as of first day of the Plan Year
- Federal Poverty Line (FPL) Safe Harbor: Does not exceed 9.5% of FPL for single individual
Choosing one of these Safe Harbors to measure the affordability of an employer’s plan will enable the employer to see if any full-time employees are likely to qualify for subsidized coverage. A Workforce Analysis done by Keenan will determine how many employees are considered to be full-time under ACA and need to be tested under one of the affordability Safe Harbors. And a Strategic Impact Study will enable the employer to look at solutions and alternatives that they can present to their governing body or board to make final decisions. For more information, see our Briefing or contact your Keenan representative.