Three Shades of Affordability

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There’s a lot of talk about whether health coverage is affordable thanks to the Affordable Care Act (ACA).  Confusing the discussion, however, is the fact that affordability pops up in three different places – the Employer Mandate, the Individual Mandate and eligibility for premium tax credits or cost-sharing subsidies.  You may be wondering, “What’s the difference?  Affordable coverage is affordable coverage, right?”  Well, not always.  Here’s a cheat sheet to help keep things straight.

Premium Tax Credit or Cost-Sharing Subsidy – Individuals and families with household incomes between 138% and 400% of the federal poverty line (FPL) may be eligible for premium tax credits to lower the cost of coverage purchased through Covered California.  In addition, those eligible for a premium tax credit and whose household income is between 138% and 250% of the FPL may also receive cost-sharing subsidies to reduce their out-of-pocket expenses.

However, employees within these income ranges are ineligible for either the premium tax credit or cost-sharing subsidy if they are offered affordable, minimum value (MV) coverage through their employer.  For this purpose, coverage is affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides MV does not exceed 9.5% (indexed annually) of the employee’s household income.  For 2015, the indexed percentage is 9.56%.

Employer Mandate – Under the Employer Mandate, an Applicable Large Employer (ALE) may be subject to a penalty if it fails to offer its ACA defined full-time employees, and their dependents, minimum essential coverage (MEC) that is affordable and provides MV.  Coverage is affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides MV does not exceed 9.5% of the employee’s household income for the taxable year.  Since it is unlikely an employer will know their employees’ household incomes, they can use one of three safe harbors – Form W-2, Rate of Pay or FPL – to determine whether coverage is affordable for an employee.  However, the 9.5% limit is not indexed for the affordability safe harbors.

Individual Mandate – The ACA requires most individuals to have MEC for themselves and their dependents or otherwise pay a penalty.  However, some individuals may be exempt from the requirement under certain conditions, such as lack of access to affordable coverage.  For this purpose, coverage is affordable if the individual’s contribution is no more than 8.0% (indexed annually) of his or her household income.  For 2015, the indexed percentage is 8.05%.

What do these differences mean?  Coverage can be affordable for purposes of the employer avoiding a penalty under the Employer Mandate (because it satisfies a safe harbor) but unaffordable for purposes of the employee’s eligibility for a premium tax credit (because it exceeds 9.56% of the employee’s household income).  In that case, the employee could get a premium tax credit but it wouldn’t trigger a penalty for the employer.

Alternatively, coverage could be affordable for purposes of the Employer Mandate and the premium tax credit (because it satisfies a safe harbor and is less than 9.56% of the employee’s household income) but unaffordable for purposes of the Individual Mandate (because it exceeds 8.05% of the employee’s household income).  In that case, the employee wouldn’t be subject to the Individual Mandate penalty if he or she didn’t have coverage but also wouldn’t be eligible for a premium tax credit and the employer wouldn’t be subject to a penalty under the Employer Mandate.

As you can imagine, each individual’s circumstance can give rise to a variety of situations in which coverage is affordable for one purpose but not another.  And that’s why it’s important to start by asking this key question when talking about affordability – “Affordable for what purpose?”