Clarifying “Affordability” for Applicable Large Employers

Clarifying “Affordability” for Applicable Large Employers

Beginning in 2015, Applicable Large Employers (ALEs) with 100 or more full-time employees including full-time equivalents will either need to offer coverage that is 1.) affordable, and 2.) provides minimum value, or potentially risk excise tax penalty liability. There has been some confusion in the compliance world regarding the definition of “affordability” as it relates to the above conditions. This is largely due to the fact that the Affordable Care Act (ACA) uses two definitions of “affordability” as it relates the Employer Shared Responsibility Provisions (“Pay-or-Play”).

For plan years beginning in 2015, employer-sponsored coverage will generally be considered affordable under the Pay-or-Play rules if the employee’s required contribution for self-only coverage does not exceed 9.56 percent of the employee’s household income for the year; increased from 9.5 percent (see IRS Rev. Proc. 2014-37). ALEs, however, are generally not in a position to assume an employee’s household income. As such, the regulations provide for safe harbors to allow the ALE to calculate affordability based on the amount the employer pays the employee. IRS Rev. Proc. 2014-37 does not address the affordability safe harbors regarding the increase from 9.5 to 9.56 percent of amount ALE pays the employee.

The Pay-or-Play affordability rules determine affordability by reference to the rules for determining premium tax credit eligibility through government health insurance marketplaces. The affordability safe harbor rules, however, do not reference the premium tax credit eligibility rules. Instead, the safe harbor rules specifically use 9.5 percent as the required contribution.

While the IRS may issue future guidance addressing this regulatory discord, the conservative guidance for ALEs, therefore, is to use 9.5 percent (and not the adjusted 9.56 percent) when performing the safe harbor calculations.

ALEs utilizing the affordability safe harbors will be required to report which safe harbors they utilized on the 6055 and 6056 reporting due in 2016 for calendar year 2015. It is important, therefore, to ensure that the safe harbor calculations are performed in compliance with the above guidance.