The United States Governmental Accountability Office (GAO) has published the findings of a study that advocates the use of the family premium as the employer mandated affordability requirement as outlined by the Affordable Care Act.
The employer mandate was not challenged by the plaintiffs in the recent decision issued by the Supreme Court – which sustained that all of the Act save the provision permitting the United States Department of Health and Human Services (HHS) to withhold a state’s entire Medicaid federal subvention if the state chooses not to adopt the Act’s Medicaid expansion. The mandate requires that all “applicable large employers” – employers who employ 50 or more full time or full time equivalent employees must sponsor a group health benefit plan that covers all bona fide full time employees (those who regularly work 30 or more hours per week) and offer enrollment in a health plan that offers “minimum value” and is “affordable.”
If the employer’s plan fails these tests, then the employer must pay a penalty. If the employer does offer coverage to all bona fide full time employees, but fails to satisfy both the affordability requirement and the minimum value requirement, then the employer must pay a penalty equal to $3,000 times the number of bona fide full time employees who are eligible for the Act’s new Exchange premium subsidies (any employee whose household income is between 100% and 400% of the federal poverty limit) and who enroll in an Exchange-offered health plan.
“Minimum value” means the plan’s share of projected health care claims (i.e., total allowable claims minus the portion that plan participants must pay out of pocket through deductibles, copayments, or co-insurance) must equal or exceed 60% of the total projected health care claims. A December 2011 HHS study stated that virtually all current employer-sponsored health plans satisfy this minimum value requirement (a plan runs the risk of falling below 60% when its deductible begins to exceed $6,000 per person).
That leaves the “affordability” requirement. The Act defines this as a requirement that the employee’s share of the plan premium must not exceed 9.5% of the employee’s household income.
However, the vague language leaves room for interpretation. Which premium? The single premium? Or the premium for the coverage in which the employee actually enrolls? The median single premium nationwide this year is approximately $5,500; the median family premium is $15,500. If the single premium is the benchmark, then the employer avoids the penalty as long as the employee’s share of the single premium is less than 9.5% of household income. For example, assume an employee’s total household income is $45,000. 9.5% of $45,000 is $4,275. As long as the employee’s share of the single premium is less than $4,275, the employer avoids the penalty. That means:
- The employee’s share of the single premium cannot exceed $4,275, which also means the employee can be obligated to pay up to 78% of the single premium ($4,275 divided by $5,500).
- If the employee elects family coverage, the employer could contribute what it would have contributed for single coverage – $5,550 minus $4,275, or $1,225 – and the employee would have to pay the balance of the family premium. That means the employee would have to pay $13,050 for family coverage.
The IRS adopted this interpretation in its May 23, 2012 final regulations defining individual eligibility. The IRS has also stated that future regulations concerning employer-sponsored coverage will provide the final rules in determining affordability for related individuals and proposed rules on determining minimum value.
If the IRS had chosen the premium for the coverage the employee actually selects as the benchmark, then, using the facts in our previous example, here’s the result:
- If the employee enrolls in single coverage, then the employee’s share of the premium is the same as in our previous example: the employee must pay $4,275 and the employer pays $1,225.
- If the employee enrolls in family coverage, once again, the employee’s share of the premium may not exceed 9.5% of the employee’s household income – a maximum employee premium of $4,275. The employer must pay the balance, or $11,225.
As you have guessed, employers dearly want the Act to be interpreted to require the use of the single premium, regardless of the coverage the employee actually selects, and in their comments on the proposed regulation, have applauded the IRS’s choice. Advocacy groups for children, among others, have submitted comments advocated the use of the premium for the coverage the employee actually selects.
Through the results of their study, the GAO has sided with the advocacy groups for children. However, until the final regulations are issued by the IRS, the debate is certain to continue.