What makes coverage affordable?
Whether coverage is "affordable" under ACA depends on the monthly premium charged to each full-time employee for the employer's lowest cost, self-only coverage. Coverage under an employer-sponsored plan is affordable if the employee's required contribution for the lowest cost self-only coverage offered does not exceed 9.5% of the employee's household income for the taxable year.
To avoid penalties, does coverage have to be affordable for dependents as well as full-time employees?
No. Employers must offer coverage to dependent children up to age 26 in order to avoid exposure to the "no-coverage" penalty under ACA, but to avoid the unaffordability penalty, coverage only needs to be affordable for the full-time employee. The affordability analysis is based on the employee's "self-only" premium contribution, and does not factor in the additional cost of covering dependent children or spouses under a plan.
How much is the penalty for failure to offer affordable coverage?
An employer must offer affordable coverage to substantially all of its statutorily defined full-time employees (30 hours or more of service in any given month) or face potential penalties. If any full-time employee is offered coverage that is not affordable and subsequently applies for and is qualified to receive subsidized coverage through Covered CA, California's state-run health insurance exchange, a penalty may apply.
The unaffordability penalty amounts to $250 per month for each employee who actually obtains subsidized coverage in the exchange, and is capped at the amount that the employer would have had to pay if it completely failed to offer coverage.
We do not know our employees' household incomes. How do we know if the coverage we offer is affordable?
Because employers typically do not know the total household income of each employees, ACA provides three affordability safe harbors.
Form W-2 Safe Harbor: Under this safe harbor, coverage is affordable if the required employee contribution toward the self-only premium for the employer's lowest cost coverage providing minimum value is less than or equal to 9.5 percent of the employee's wages reported in Box 1 of Form W-2.
Pro: This method includes all hours the employee actually worked as well as paid holidays, vacation, and other leave, and it is not limited to 130 hours per month.
Con: The Box 1 wages will also only include taxable amounts. Salary reductions due to elections under a section 401(k) plan or a cafeteria plan under section 125 are not added back in to the Box 1 wages. Employers will not know the exact amount until after the end of the year.
Rate of Pay Safe Harbor: Under this safe harbor, the employer takes the hourly rate of pay for each hourly employee and multiples that rate by 130 hours per month. Affordability is then determined based on the resulting monthly wage amount for hourly employees, or the monthly salary for salaried employees. Coverage is affordable if the employee's monthly contribution is less than or equal to 9.5 percent of the monthly wage amount as calculated above.
Pro: An employer can calculate affordability at the beginning of the plan year.
Con: If the employer reduces the employee's rate of pay during the year, the rate of pay must be applied separately to each calendar month. An employer may only multiply the hourly rate by 130 hours per month, regardless of whether employees actually work more hours.
Federal Poverty Line Safe Harbor: Under this safe harbor, coverage is affordable if an employee's premium contribution does not exceed 9.5 percent of the Federal Poverty Line for a single individual.
Pro: This calculation is easy to apply, as it will be the same for all employees.
Con: The maximum employee contribution is limited. Based on the 2014 Federal Poverty Line of $11,670 for an individual, the maximum employee contribution would be $92.38.
An employer may choose any of the affordability safe harbors, but they must be applied on a reasonable and consistent basis for all employees in a specific category. Reasonable categories include specified job categories, nature of compensation, geographic location, or similar bona fide business criteria.