The employer responsibility provisions of the Patient Protection and Affordable Care Act 1 (the Act) generally require “applicable large employers” — i.e., those with more than 50 full-time equivalent employees — to pay an assessable payment or penalty if any of the employer’s full-time employees is certified to receive a premium tax credit toward, or cost-sharing reduction in connection with, the purchase of health insurance through a state-based insurance exchange. The amount of penalty varies depending on whether the employee offers to its full-time employees “minimum essential coverage” under an eligible employer-sponsored plan and, if so, whether that coverage provides “minimum value” and is “affordable.” Coverage under an eligible employer-sponsored plan is not affordable if the employee-provided premium for self-only coverage exceeds 9.5% of the employee’s “household income.” In Notice 2011-73, the Internal Revenue Service proposed and solicits comments on a safe harbor under which an employee’s “household income” is presumed to equal his or her W-2 wages solely for purposes of determining the amount of the employer penalty. This client advisory explains the impact of Notice 2011-73.
Under Code § 4980H (as added by Act § 1513), an applicable large employer is subject to an assessable payment if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and either —
- The employer does not offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (the “no-coverage prong”); or
- The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage that either is unaffordable or does not provide minimum value (the “coverage prong”).
Under the “no-coverage” prong, if an employer fails to make an offer of coverage to its full-time employees, an assessable payment is imposed monthly in an amount equal to $166.67 multiplied by the number of the employer’s full-time employees, excluding the first 30. Under the “coverage” prong, if the employer makes an offer of coverage, the assessable payment is equal to $250 per month multiplied by the number of full-time employees who qualify for and receive a premium tax credit or cost-sharing reduction from a state health insurance exchange. The amount of the assessable payment under the coverage prong is capped at the amount that would be charged under the no-coverage prong. As a result, an employer that offers group health plan coverage can never be subject to a larger assessable payment than that imposed on a similarly situated employer that does not.
The term “minimum essential coverage” includes coverage under an “eligible employer-sponsored plan.” An “eligible employer-sponsored plan” means a “group health plan offered in the small or large group market within a state” but does not include “excepted benefits” (e.g., stand-alone dental and vision plans). Coverage is deemed to provide “minimum value” if it pays for at least 60% all plan benefits, without regard to co-pays, deductibles, co-insurance and employee premium contributions. Coverage under an employer-sponsored plan is affordable to a particular employee if the employee’s required contribution does not exceed 9.5 % of the employee’s “household income” for the taxable year. “Household income” for this purpose is defined as the modified adjusted gross income of the employee and any members of the employee’s family (which would include any spouse and dependents) who are required to file an income tax return. Modified adjusted gross income means adjusted gross income increased by amounts excluded from gross income under Code § 911 (relating to foreign income) and by the amount of any tax exempt interest a taxpayer receives or accrues during the taxable year.
Click here to view a flow chart summarizing the rules governing assessable payments under Code § 4980H.
To fully appreciate the manner in which the Act’s shared responsibility rules apply requires a brief diversion into the individual mandate and premium tax credits and cost-sharing subsidies available to low-income individuals. Beginning in 2014, individuals and small businesses will be able to purchase private health insurance through state-based insurance exchanges. The Act provides tax credits for the purposes of assisting individuals and families to purchase affordable health insurance coverage and to pay out-of-pocket costs by reducing out-of-pocket premium expense and providing cost-sharing payments, respectively. State-based insurance exchanges will make advance determinations of eligibility for individuals seeking financial assistance based on information submitted at the time of enrollment. Once an individual qualifies, advance payments are made monthly to the health insurance issuer of the health plan in which the individual chooses to enroll.
To be eligible for a premium tax credit, an individual:
- Must have a household income for the taxable year between 100% and 400% of the federal poverty line (FPL) for the individual’s family size;
- May not be claimed as a dependent by another taxpayer; and
- Must file a joint return, if married.
The amount of premium assistance credit is the sum of the premium assistance amounts for all “coverage months” in the taxable year. A “coverage month” is any month for which an individual or any family member is covered by a qualified health plan through an exchange and the premium is paid by the individual or through an advance credit payment. A coverage month generally does not, however, include a month in which the individual is eligible for “minimum essential coverage.” Minimum essential coverage for this purpose includes government-sponsored coverage (e.g., Medicare, Medicaid, CHIP, TRICARE, and veterans’ health care). Employer-sponsored plans also may be minimum essential coverage, provided (as explained above) that the employee’s share of the premiums is “affordable” and the coverage provides “minimum value.” An individual is treated as eligible for employer-sponsored minimum essential coverage if the individual actually enrolls in an eligible employer-sponsored plan, even if the coverage does not meet the affordability and minimum value requirements.
Click here to view a flow chart summarizing the rules governing for the premium tax credits and cost-sharing subsidies.
The preamble to Notice 2011-73 anticipates an obvious problem:
Because affordability is determined by reference to household income and because household income is determined by reference to variables that are generally unknown to an employer (i.e., the modified adjusted gross income of the employee and the employee’s spouse and dependents), employers may encounter practical difficulties in assessing whether the coverage they are offering is affordable to certain employees. To address this concern and provide employers a more workable option for determining the affordability of their health coverage, Treasury and the IRS expect to propose an affordability safe harbor whereby, for purposes of Code § 4980H(b), affordability of an employer’s coverage would be measured by reference to an employee’s wages from that employer. Wages for this purpose would be the total amount of wages as defined in § 3401(a), which is the amount required to be reported in Box 1 of Form W-2, Wage and Tax Statement (W-2 wages).
To qualify for this proposed safe harbor, an employer must meet the following requirements:
- The employer must offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, and
- The employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value must not exceed 9.5 percent of the employee’s W-2 wages.
Where the employer satisfies both of these requirements for a particular employee, the employer is not subject to an assessable payment (under the coverage prong) with respect to that particular employee, even if that employee receives a premium tax credit or cost-sharing reduction. As proposed, the safe harbor would be determined after the end of the calendar year and on an employee-by-employee basis, taking into account the W-2 wages and the employee contribution.
Example: An employer could determine whether it met the proposed affordability safe harbor for 2014 for an employee by looking at that employee’s W-2 wages for 2014 and comparing 9.5 percent of that amount to the employee’s 2014 employee contribution.
Although the determination of whether an employer actually satisfied the safe harbor would be made after the end of the calendar year, an employer could also use the safe harbor prospectively, at the beginning of the year, by structuring its plan and operations to set the employee contribution at a level so that the employee contribution for each employee would not exceed 9.5 percent of that employee’s W-2 wages for that year. Employers, on a consistent basis, would be permitted to make reasonable and necessary adjustments for pay periods so that the employee contribution does not exceed 9.5 % of the employee’s W-2 wages.
Importantly, the safe harbor proposed by Notice 2011-73 applies only to the determination of the amount an employer’s assessable penalty Code § 4980H(b). In most cases, if employer-sponsored coverage is affordable based on the employee’s W-2 wages, it would also be affordable based on the employee’s household income because an employee’s household income is likely to be greater than the employee’s W-2 wages. But there are circumstances in which an employee’s household income is less than the employee’s W-2 wages — for example, as a result of adjustments to gross income for alimony paid or losses due to self-employment. In these instances, the proposed safe harbor would not affect an employee’s eligibility for a premium tax credit.