David R. Burton October 2013David R. Burton October 2013. NSBA Small Business Guide to Health Care...

David R. Burton

October 2013

NSBA Small Business Guide to Health Care Law P a g e | 2 Table of Contents

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This publication is designed to provide accurate and authoritative information in regard to the

subject matter covered. It is sold with the understanding that the publisher is not engaged in

rendering legal, accounting or other professional service. If legal advice or other expert service is

required, the services of a competent professional person should be sought.

From a Declaration of Principles jointly adopted by a Committee of the American Bar

Association and a Committee of Publishers and Associations

The publisher, editors and authors must disclaim any liability, in whole or in part, arising from

the information in this volume. The reader is urged to verify the reference material prior to any

detrimental reliance thereupon. Health care law, regulations and administration are rapidly

changing. Neither the publisher, nor editors, nor author, nor any other party involved in the

preparation or publication of this guide warrants that the information contained herein is in every

aspect accurate or complete. Neither the publisher, nor editors nor author are rendering

professional advice or services to individual readers.

© 2013 National Small Business Association, 1156 15th

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ISBN 978-0-9892266-0-8.

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“Use of payroll periods. For payroll periods that are one week, two weeks, or semi-monthly in

duration, an employer is permitted to treat as a measurement period a period that ends on the last

day of the payroll period preceding the payroll period that includes the date that would otherwise

be the last day of the measurement period, provided that the measurement period begins on the

first day of the payroll period that includes the date that would otherwise be the first day of the

measurement period.1”

From the IRS health care law “Shared Responsibility for Employers” regulations—which

are allegedly written in the English language.


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Table of Contents Preface ........................................................................................................................................................................... 8

Overview ...................................................................................................................................................................... 10

Employer’s Decision Tree................................................................................................................................. 10

Key Points Overview ........................................................................................................................................ 12

Introduction to the Law ............................................................................................................................................... 15

The Patient Protection and Affordable Care Act .............................................................................................. 15

Non PPACA Requirements ............................................................................................................................... 16

Potential Impact on the Health Insurance Marketplace.............................................................................................. 17

Thoughts About What to Focus On ............................................................................................................................. 19

Implementation Timeline ............................................................................................................................................ 21

The “Employer Shared Responsibility” Provisions ....................................................................................................... 23

Applicable Large Employers ............................................................................................................................. 23

Full-Time Employees ........................................................................................................................................... 24

Part-Time Employees (Calculating Full-Time Equivalents) .................................................................................. 25

New Employers ................................................................................................................................................... 25

Seasonal Employers ............................................................................................................................................ 25

Aggregation Rules ............................................................................................................................................... 25

What Must be Offered ..................................................................................................................................... 26

Minimum Essential Coverage .............................................................................................................................. 26

Unaffordable Coverage ....................................................................................................................................... 26

Minimum Value ................................................................................................................................................... 26

Who are Employees and Which Employees Must Be Covered ......................................................................... 26

Penalties .......................................................................................................................................................... 27

Applicable Large Employers Not Offering Health Coverage ............................................................................... 27

Applicable Large Employers Offering Health Coverage ...................................................................................... 30

Tax Deductibility of the “Assessable Payment” ................................................................................................ 32

Penalty Administration .................................................................................................................................... 32

Waiting Periods ............................................................................................................................................... 32

Summary of Benefits and Coverage ................................................................................................................. 32

Coverage Options Notice ................................................................................................................................. 33

Individual Mandate, Tax Subsidies and Penalties ........................................................................................................ 34

Individual Mandate ......................................................................................................................................... 34

Tax Subsidies ................................................................................................................................................... 34


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Individual Penalties ......................................................................................................................................... 36

Insurance Policy Regulation ......................................................................................................................................... 38

Essential Benefits and the Metal Levels ........................................................................................................... 38

Deductibles ..................................................................................................................................................... 39

Pre-Existing Conditions .................................................................................................................................... 39

Young Adult Coverage Requirement ................................................................................................................ 39

Preventive Care Coverage Requirement .......................................................................................................... 39

Coverage Rescission Limitations ...................................................................................................................... 39

Lifetime and Annual Coverage Limits ............................................................................................................... 40

Age, Gender and Tobacco Rating ..................................................................................................................... 40

Exchanges .................................................................................................................................................................... 41

What is an Exchange? ...................................................................................................................................... 41

Types of Exchanges .......................................................................................................................................... 41

Small Business Health Options Programs (SHOPs) ........................................................................................... 41

Multi-State Plan Programs (MSPPs) ................................................................................................................. 42

State Status Summary ..................................................................................................................................... 42

Wellness Programs ...................................................................................................................................................... 45

Participatory Wellness Programs ..................................................................................................................... 45

Contingent Wellness Programs ........................................................................................................................ 46

Taxes ............................................................................................................................................................................ 47

Small Employer Health Insurance Tax Credit ................................................................................................... 47

Determining Eligible Small Employer Status ....................................................................................................... 48

Number of Employees ......................................................................................................................................... 48

Qualifying Arrangements .................................................................................................................................... 49

Annual Wage Limitation ..................................................................................................................................... 49

Allowable Health Insurance Premiums ............................................................................................................... 49

Small Group Market Limitation ........................................................................................................................... 49

Phase-Out ........................................................................................................................................................... 51

Calculating the Credit .......................................................................................................................................... 51

Health Insurance Tax (HIT) ............................................................................................................................... 52

Medicare Tax on Wage or Self-Employment Income ....................................................................................... 53

Investment Income Tax ................................................................................................................................... 54

Medical Device Tax .......................................................................................................................................... 54

Tax on High-Cost Insurance Plans .................................................................................................................... 54


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W-2 Reporting ................................................................................................................................................. 54

Tax-Advantaged Health Care Accounts ............................................................................................................ 55

Flexible Spending Accounts/Arrangements (FSAs) .............................................................................................. 55

Medical Savings Accounts (MSAs)....................................................................................................................... 56

Health Reimbursement Arrangements ............................................................................................................... 56

Health Savings Accounts ..................................................................................................................................... 57

Tax-Advantaged Health Account Comparison Table .......................................................................................... 57

Exclusion from Employee Income .................................................................................................................... 58

The Self-Insurance/Stop Loss Option........................................................................................................................... 59

ERISA Health Plan Requirements ................................................................................................................................. 60

Summary Plan Description .............................................................................................................................. 60

Other Requirements ........................................................................................................................................ 61

COBRA .......................................................................................................................................................................... 62

Qualified Beneficiaries ..................................................................................................................................... 62

Qualifying Events ............................................................................................................................................. 63

Coverage Continuation .................................................................................................................................... 63

Required Notices ............................................................................................................................................. 64

Penalties .......................................................................................................................................................... 65

Health Insurance Portability and Accountability Act ................................................................................................... 66

Pre-Existing Conditions, Eligibility and Portability ........................................................................................... 66

Privacy ............................................................................................................................................................. 67

Other Matters .............................................................................................................................................................. 68

The Family and Medical Leave Act ................................................................................................................... 68

The Genetic Information Nondiscrimination Act.............................................................................................. 68

Non-Discrimination and Whistleblower Protections ........................................................................................ 69

Business Size and Applicability of PPACA .................................................................................................................... 70

Glossary of Health Care and Health Insurance Terms ................................................................................................. 71

Explanation of Acronyms ............................................................................................................................................. 81

Statutes, Regulations, Guidance and Court Decisions ................................................................................................. 83

Federal Law ..................................................................................................................................................... 83

State Law ......................................................................................................................................................... 83

Additional Information .................................................................................................................................... 84

Supreme Court Decision .................................................................................................................................. 85

NSBA’s Health Care Policy ........................................................................................................................................... 86


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Updates and Revisions ................................................................................................................................................. 88

About the National Small Business Association .......................................................................................................... 89

About the National Small Business Law Center ........................................................................................................... 90

About the Author ......................................................................................................................................................... 91

Acknowledgments ....................................................................................................................................................... 92

Endnotes...................................................................................................................................................................... 93


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“All of us learn to write in the second grade. Most of us go on to greater things.”2 --Bobby Knight

Preface

This National Small Business Association Small Business Guide to Health Care Law is designed

to provide practical information to small business owners, managers and their advisors. Its

primary focus is the Patient Protection and Affordable Care Act (PPACA) but it also addresses

other health care and health insurance laws that small businesses should consider as they operate

their business. It is designed to provide actual answers to difficult and often complex questions.

It is more than just a summary or overview.

Health care laws have become extraordinarily complex. Only the tax law is more byzantine. Of

course, large portions of the PPACA are additions to the Internal Revenue Code ensuring that tax

law retains the ignominy of being the least comprehensible part of federal law.

The Internal Revenue Code gradually evolved and increased in complexity over a century.3 The

bureaucratic, legal and accounting infrastructure necessary to administer, enforce and comply

with the income tax is enormous. The PPACA rivals the income tax in complexity. It and its

implementing regulations have been dropped onto the private sector and, to a lesser degree, the

states with only six to nine months before it is supposed to be up and running. Implementation is

unlikely to go smoothly.

Every effort has been made to accurately summarize the law in the clearest and most economical

language possible. Nevertheless, no one will find this guide simple to read. This is because the

law it describes is anything but simple. That is an unfortunate fact that we all must deal with. My

eyes glazed over numerous times reading the various PPACA regulations. I am sure that this

guide may serve to cure some readers’ insomnia and in that sense it may be helpful in a way not

originally intended by me. It may, therefore, constitute an illegal unregistered medical device.4 I

ask you not to inform the FDA.

Given the underlying complexity of the law and its implementing regulations combined with the

potentially large financial impact of the decisions that small firms will need to make, it seemed

that accuracy and completeness of coverage were as important as brevity. This is particularly so

because most of the “guides” published to date do not go into sufficient detail to allow a small

business to calculate the actual impact the PPACA will have on the business or to accurately

evaluate what steps it should take.

The rules implementing the PPACA are still a moving target. The law was passed in March

2010. Most of the key rules were issued in December 2012 through February 2013 in proposed

form almost three years after the law was enacted. Many of these rules are not yet final rules. Yet

the states and the private sector are expected to have an entirely new, extremely complex health

insurance system up and running by October 1, less than six months after proposed (and some

final) rules became available. On July 2, 2013, the administrative announced that the employer

mandate penalties will be delayed for one year. On September 26, 2013, the administration

announced that the small business “SHOP Marketplace” in federal exchanges will not be up and


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running until November. In any event, it is likely that revised editions of this guide will be

necessary.

Throughout this guide, the aim has been to summarize the primary legal requirements in the

main text. The guide, however, does provide more detailed information and citations in the

endnotes. Links to the law and regulations can be found in both the endnotes and the “Statutes,

Regulations and Court Decisions” section. This latter information is likely to be of more value to

those advising small businesses or those who must manage actual compliance with the legal

requirements imposed by the law. A glossary, a decision tree, an implementation timeline and a

section providing some thoughts about what to focus on have been added to try to help the reader

better understand the law and its requirements. Finally, I have highlighted “key points”

throughout the text to try to draw readers’ attention to the most important things they need to

know and these key points are summarized in one section toward the end of the guide.

Reading this guide will help a small business owner or manager understand the legal and issues

raised by federal health care laws. Nevertheless, consulting with your attorney, insurance agent,

benefits advisor and accountant is highly recommended.

This guide was completed in late September of 2013 and the discussion is as accurate as the

author could make it as of that date. Things will change and the reader needs to be aware of that.

Please visit www.healthreformtoday.org for the latest updates.

http://www.healthreformtoday.org/


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“LAWYER, n. One skilled in circumvention of the law.” --Ambrose Bierce, The Devil’s Dictionary

Overview

Given the complexity of the PPACA, this guidance document is lengthy and detailed in order to

provide the best, most accurate information possible. We understand the time constraints facing

small-business owners and therefore have compiled this brief overview which includes a so-

called “Decision Tree” designed to walk employers through the very basic and initial steps they

will need to take to be compliant with the law. Additionally, we have summarized the key points

from throughout the document in one place which includes links to each of the key points where

the reader can gain more detailed information.

EMPLOYER’S DECISION TREE

NSBA has developed a decision tree to help provide a framework for thinking about the PPACA.

It is important to remember that it “simplifies” away a wide range of issues, and while it can

point employers in the right direction, it does not account for each and every unique

circumstance of employers as they are impacted by the law.

When evaluating whether business factors warrant purchasing employee health insurance

remember to evaluate (1) health insurance exchange policies, (2) “outside” (existing) small

group market health insurance policies, and (3) self-insurance with stop loss insurance.

Inevitably, making these important decisions means making projections about an uncertain

future. So conducting some “what ifs” and attaching likelihoods to various scenarios is

necessary. Potential or actual “applicable large employers” will need to project their number of

employees and the number of employees likely to receive premium assistance tax credits. Small

employers will need to project their number of employees and their average wage paid.

Remember that penalties imposed for not complying with the employer mandate are not tax-

deductible. Health insurance premiums paid are tax deductible but not taxable as income to

employees.

Remember 2014 is the relevant year for determining whether your business is an “applicable

large employer” for purposes of 2015 employer penalties unless your business is a new business.


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PPACA Decision Tree

Yes No

Yes No Yes No

then

then then

Is your business an “applicable large employer”?

(50 or more FTEs as determined by the regulations)

Only applicable large employers are subject to penalties for

failing to offer insurance. No employer penalties will be

imposed until 2015.

Do you plan to offer health insurance meeting

the minimum essential coverage requirements?

(i.e. the coverage offered must be deemed

affordable and to offer minimum value as

determined by the regulations)

Is your business eligible for the small

employer tax credit?

(Some credit is generally provided to

employers with 25 or fewer employees who

pay average wages of $50,000 or less and

pay at least half of employee health insurance

costs)

Determine the tax

credit amount.

Evaluate whether

business factors

warrant

purchasing

employee health

insurance.

Evaluate whether

business factors

warrant

purchasing

employee health

insurance using

the net of tax

credit cost (and

consider that the

tax credit is

available for only

two years).

Determine the

penalty that will

be imposed for

not offering

health coverage.

(Generally,

$2,000 times the

number of

employees in

excess of 30)

Evaluate whether

business factors

warrant

purchasing

employee health

insurance in light

of the projected

penalty.

Determine the penalty

that will be imposed

for employees that

receive a premium

assistance tax credit.

(Generally, $3,000

times the number of

employees receiving

the tax credit)

Evaluate whether

business factors

warrant purchasing

employee health

insurance in light of

the projected penalty.


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“It is difficult to make our material condition better by the best laws, but it is easy enough to ruin it by bad laws.”5 --Theodore

Roosevelt

KEY POINTS OVERVIEW

This section simply presents the key points identified throughout the text in one convenient

place. Simply click on the hyperlinked “Details” at the end of each of the key points to gain

additional information on each of these points.

(1) Key Point: Firms with relatively young employee populations are likely to see substantial and potentially dramatic increases in health insurance costs in 2014 and again in 2015. (Details)

(2) Key Point: Small businesses should evaluate four health insurance choices: (1) health insurance offered on the exchange; (2) health insurance offered on the existing small group

market; (3) self-insurance paired with stop loss insurance and (4) not offering health insurance.

(Details)

(3) Key Point: Starting in 2015, if your business is deemed an “applicable large employer” it must provide affordable insurance of specified minimum value or pay a penalty. (Details)

(4) Key Point: Both full-time and part-time employees are considered when determining whether your business meets the 50 employee threshold for an “applicable large employer”

subject to the employer mandate. (Details)

(5) Key Point: The relevant year for determining whether your business is an “applicable large employer” subject to the employer mandate is 2014 even though the mandate starts in

2015. (Details)

(6) Key Point: Business owners who have an interest in more than one business must carefully consider the aggregation rules when determining whether your businesses will be

treated as a single “applicable large employer” subject to the employer mandate. (Details)

(7) Key Point: When determining whether employer provided health insurance is affordable for purposes of the PPACA, the employer need only consider the cost of insuring the employee

not the employee’s dependents. (Details)

(8) Key Point: In general, the PPACA adopts the same definition of employee as used for payroll tax purposes. However, a leased employee, a sole proprietor, a partner in a partnership, or

a 2-percent S corporation shareholder is not an employee for PPACA purposes. (Details)

(9) Key Point: Applicable large employers that do not offer health insurance coverage will be subject to a penalty of $2,000 per employee. (Details)


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(10) Key Point: When calculating the employer penalty due, the full-time employee count is reduced by 30. Thus, for example, an employer with 55 full-time employees would pay a penalty

with respect to only 25 employees. (Details)

(11) Key Point: In general, ongoing employees that work an average of at least 30 hours will be treated as full-time employees for purposes of calculating any penalty owed. (Details)

(12) Key Point: Applicable large employers that do offer coverage will be subject to a penalty of $3,000 per employee who receives a premium assistance tax credit (because the coverage was

not deemed affordable) but that penalty may not exceed what would have been imposed had the

employer not offered insurance at all. (Details)

(13) Key Point: Employees are only allowed a premium assistance tax credit if the coverage provided is deemed unaffordable. In general, an eligible employer-sponsored plan is deemed

affordable for an employee if the portion of the annual premium the employee must pay, whether

by salary reduction or otherwise (the required contribution), for his or her own coverage does not

exceed 9.5 percent of the employee’s household income for the taxable year. (Details)

(14) Key Point: The IRS provides three safe harbors so an employer does not have to guess its employees’ household income for purposes of determining whether the employer’s health

insurance will be deemed affordable. (Details)

(15) Key Point: The fact that the “assessable payment” (penalty) is not tax deductible raises its actual cost. Health insurance premiums are tax deductible. (Details)

(16) Key Point: Work with your insurance provider to make sure that it provides to you and your employees both the necessary “Summary of Benefits and Coverage” and the ERISA

summary plan description. These requirements apply to all employers offering health insurance.

(Details)

(17) Key Point: Employers must provide current and new employees with a “coverage options notice. DOL has provided model notices. (Details)

(18) Key Point: Understanding the premium assistance tax credit is important to “applicable large employers” because even those that do offer “minimum essential” health insurance

coverage will pay a penalty of $3,000 per employee that receives a premium assistance tax

credit. (Details)

(19) Key Point: Employers must offer at least bronze level coverage (i.e. 60 percent of the actuarial value of the relevant essential health benefits benchmark plan) to meet the “minimum

value” requirements. (Details)

(20) Key Point: Starting in 2014, to receive the small employer tax credit, an employer must purchase its health insurance through the Small Business Health Options Program (SHOP).

(Details)


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(21) Key Point: Employers may want to work with their health insurance provider to see if implementing a workplace wellness program can reduce health insurance costs. In addition,

workplace wellness programs may prove to be one of the biggest potential differences among

competing health insurance plans in the new regulatory environment, so employers should

consider this aspect of health insurance plans when shopping for policies. (Details)

(22) Key Point: A temporary (two year) small employer health insurance tax credit of up to 50 of health insurance costs is available to firms with 25 or fewer employees and average wages of

$50,000 per employee or less. It is substantially limited for firms with more than 10 employees

or average wages over $25,000. (Details)

(23) Key Point: FSAs, HRAs and HSAs are a tax-free means of compensating employees. Establishing them requires the assistance of an experienced specialist because failure to comply

with the complex rules will result in a loss of the tax-advantage. (Details)

(24) Key Point: Self-insurance paired with stop loss insurance is an option most small businesses should consider in the new health care environment. Depending on market conditions

for 2014 insurance, the savings could be substantial. (Details)

(25) Key Point: COBRA is complex. It is advisable to work with a specialist to establish the proper procedures and develop the proper forms for notices and elections. The potential costs of

being out of compliance are substantial, including IRS or DOL fines and lawsuits from

disgruntled employees. The administrative costs of COBRA compliance are substantial but the

out-of-pocket costs are not. (Details)

(26) Key Point: All states have laws governing health insurance, medical care, employment law and privacy. Unfortunately, a state by state analysis is beyond the scope of this guide. These

laws could prove to be very important. A small business owner should discuss these laws with

his or her advisors. (Details)


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“A lawyer is a person who writes a 10,000 word document and calls it a brief.”6 --Franz Kafka

Introduction to the Law

The 2010 Patient Protection and Affordable Care Act (PPACA)* made dramatic changes to the

health insurance market. Most of the important changes will take effect in 2014 although the

implementation of the employer mandate has been delayed by a year to 2015.7 The legislation

will restructure the health insurance marketplace. It imposes strict regulation of health insurance

policies and creates structured health insurance markets called exchanges. It requires most

individuals to ensure that they have health insurance. It places new requirements on small

businesses and will require them to analyze whether to continue providing health insurance to

their employees. For those that continue to provide insurance, it will change the way they buy

health insurance for their employees. It provides tax credits to some small firms that continue to

provide health insurance and imposes penalties on others that provide health insurance that is

deemed “unaffordable”. It also imposes different penalties on firms that do not provide health

insurance.

There are, of course, health insurance and health care requirements that predate the PPACA

which small businesses must consider. In addition, the tax treatment of health insurance and

other health related matters is important. This guide briefly addresses those issues as well.

THE PATIENT PROTECTION AND AFFORDABLE CARE ACT

The PPACA was signed into law by President Obama on March 23, 2010.8 It was amended by

the Health Care and Education Reconciliation Act of 2010 on March 30, 2010.9 On June 28,

2012, the Supreme Court upheld the constitutionality of the law.10

The U.S. Department of

Health and Human Services (HHS), U.S. Department of Labor (DOL), the Internal Revenue

Service (IRS) and the U.S. Office of Personnel Management (OPM) have issued many complex

proposed and final regulations implementing the law. They have also issued various other forms

of guidance.

The PPACA establishes health insurance markets in each state called “American Health Benefit

Exchanges.”11

They are usually called health insurance exchanges or just exchanges. Lately,

HHS has been calling them the “Health Insurance Marketplace.” These must be up and running

by October 1, 201312

selling policies for 2014. They must include a Small Business Health

Options Program or SHOP Exchange.13

HHS has announced, however that the small business

“SHOP Marketplace” in federal exchanges will not be ready until sometime in November.14

The

deadline for states to declare to HHS whether they intend to run their own health insurance

exchange was November 16 2012.15

Eighteen states and the District of Columbia have elected to

establish state run health insurance exchanges. Six states have elected to establish partnership

* Throughout this guide a reference the PPACA is a reference to the PPACA (P.L 111-148) including amendments

made by the Health Care and Education Reconciliation Act (P.L 111-152) enacted one week later.


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exchanges with the federal government. The federal government will operate a federal exchange

in the 26 states that have declined to establish exchanges.16

Beginning in 2014, most individuals will have to ensure that they and their dependents have

health insurance or pay a penalty. Many millions of people will qualify for Medicaid or tax

subsidies to buy health insurance.

Beginning in 2015, employers with 50 or more employees (called applicable large employers)

that do not provide health insurance coverage and have at least one full-time worker who

receives subsidized coverage in the health insurance exchange will have to pay a penalty of

$2,000 per full-time employee. This provision was originally to have taken effect in 2014 but the

administration has delayed its implementation by one year.17

Part-time workers are considered for purposes of calculating the number of employees that a firm

has when determining whether an employer is an “applicable large employer” subject to the

employer mandate. The firm's first 30 workers are excluded for purposes of actually calculating

the penalty. For firms that do offer health insurance coverage a penalty of $3,000 will be

imposed for each employee that receives a premium assistance tax credit. Employees are eligible

for the premium assistance tax credit when employer coverage is deemed “unaffordable.” Some

employers with 25 or fewer employees that provide health insurance for their employees are

eligible for temporary tax credits. Employers must also provide specified information to their

employees and the law requires businesses to report additional information about health

insurance costs on W-2s.

The PPACA also heavily regulates the nature of the health insurance policies that issuers can

offer. The “essential benefits” a policy must offer are tightly specified. Premiums paid by the

oldest individuals cannot exceed those paid by the youngest by more than a ratio of three to one.

Pre-existing conditions cannot be considered by insurers. Insurers must allow parents to put their

young adult children on their policy.

The PPACA imposes a number of new taxes. It imposes a new tax on group health insurance

aimed squarely at small businesses. It raises the Medicare payroll tax. It imposes a new

investment income tax. It imposes a new medical device tax. It reduces the amount that can be

contributed to a Flexible Spending Arrangement (FSA) and limits the expenses that they cover. It

also imposes a tax on high-cost insurance plans. This latter tax is often called the “Cadillac Tax”

or the “Cadillac Plan Tax.”

NON PPACA REQUIREMENTS

This guide also addresses small business compliance with COBRA, HIPAA, the Family and

Medical Leave Act, the Genetic Information Nondiscrimination Act, ERISA summary plan

description requirements and other issues. It briefly discusses wellness programs, Flexible

Spending Arrangements (FSAs), Health Savings Accounts (HSAs), Health Reimbursement

Arrangements (HRAs) and Medical Savings Accounts (MSAs or Archer MSAs).


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“There is only one difference between a bad economist and a good one: the bad economist confines himself to the

visible effect; the good economist takes into account both the effect that can be seen and those effects that must be

foreseen.18

” --Frederic Bastiat, economist

Potential Impact on the Health Insurance Marketplace

The PPACA is expected to result in an increase in some businesses’ health insurance costs

beginning in 2014. Some have predicted “premium rate shock.”19

The three primary reasons that

the law puts upward pressure on overall health care costs are: (1) the law requires policies to

cover more procedures and services, (2) more employees must be covered and (3) the demand

for health services will increase substantially without any material increase in those who can

supply those services.20

The net cost for some of the smallest firms may temporarily go down

due to the complex and temporary employer tax credit made available by the PPACA. There are

various other provisions designed to contain health care costs.21

We will soon know the

magnitude of the premium increases. Preliminary evidence is that they will be substantial but no

comprehensive analysis has been completed.22

The most predictable effect of the PPACA is to increase health insurance costs for employers

with relatively young employee populations because of the age bands imposed by the law which

limit older persons’ premiums to no more than three times younger persons’ premiums.

Estimates vary, of course, but a recent study reported in the American Academy of Actuaries

magazine Contingencies found that under the PPACA premiums for people aged 21 to 29 with

single coverage will increase by 42 percent over premiums absent the ACA; people aged 30 to

39 with single coverage will see an average increase in premiums of 31 percent. In contrast,

those with single coverage aged 60 to 64 will see about a 1 percent average increase in

premiums.23

In March, 2013, the Society of Actuaries estimated that overall premiums in the

non-group group market will increase an average of 31.5 percent because of the PPACA.24

They

did not provide an estimate of the impact on the group market.

There is widespread concern that large numbers of young people will elect to pay the penalty

imposed by the PPACA rather than purchase costly insurance. These penalties are potentially as

low as $95 in 2014 and then $325 in 2015 but will be substantially higher for higher income

persons. It is also quite likely that many employers with young employee populations will elect

to pay the employer penalty rather than continue funding dramatically more expensive health

insurance or they may self-insure. This, in turn, will defeat one of the primary aims of the

PPACA, namely moving a large pool of healthy, low-cost, young people into the insurance pool.

If large numbers of low-cost young people do not purchase insurance, then per insured costs will

increase and subsequent year premiums (i.e. 2015 and thereafter) will increase substantially.

This, in turn, will encourage still more young people to not purchase insurance. Premiums may

end up increasing dramatically while very large numbers of young people remain uninsured or

become newly uninsured.

Key Point: Firms with relatively young employee populations are likely to see substantial and

potentially dramatic increases in health insurance costs in 2014 and again in 2015. (Overview)


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All firms will need to decide whether to continue providing health insurance to their employees

in the new environment. Providing health insurance will remain a tax-preferred means of

compensating employees and will continue to aid recruiting and retention. As discussed in detail

below, employers with 50 or more employees (calculated as the PPACA requires) will be subject

to a penalty if they do not provide health insurance for their employees and at least one of their

employees takes a federal subsidy. The application of these employer penalties has been delayed

until 2015. Employers may also be subject to a penalty if they do provide health insurance but it

is deemed inadequate. Although obviously many factors enter into the decision whether to

provide health insurance, it is quite likely that for many firms the increase in health insurance

costs will substantially exceed the penalty, particularly for firms that only slightly exceed the 50

employee threshold.25

For firms with 25 or fewer employees, the increase in health insurance

costs may be mitigated to some degree by the temporary tax credits provided under the law.

It is far from clear what the relative impact of the PPACA will be on the cost of insurance

purchased on the exchanges (particularly through the Small Business Health Options Program or

SHOP Exchange) compared to the “outside” or existing small group market or self-insurance

paired with stop loss insurance. Any employer will need to evaluate these three options and

compare them with the option of not providing employee health insurance (and potentially

paying a penalty for failure to do so).

Key Point: Small businesses should evaluate four health insurance choices: (1) health insurance

offered on the exchange; (2) health insurance offered on the existing small group market; (3)

self-insurance paired with stop loss insurance and (4) not offering employer-paid health

insurance. (Overview)


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The road to hell is paved with good intentions.26

--16th Century Proverb

Thoughts About What to Focus On

First, it will be impossible to determine what decisions you should make about health insurance

for your employees until the insurance companies have developing pricing for health insurance

policies offered through the exchanges and policies offered on the non-exchange group market.

Policies on the exchanges are to be offered by October 1, 2013 (although for small businesses in

states with a federal exchange this date has now slipped to sometime in November).

Second, almost all employers should now consider self-insurance with stop loss insurance. Self-

insurance can be accomplished with third-party administrators so it “feels” like health insurance

to the employees and involves a minimum of administrative headache to the employer. The stop

loss insurance places a limit on how much employee health benefits can cost. This approach

introduces some variability to health benefits costs but may prove to be substantially less

expensive and, depending on what traditional policies cost, may be unambiguously less

expensive.

NSBA has identified a self-insurance program that is particularly appropriate for small firms. For

more information, go to www.nsba.biz.

Third, you will need to project your 2014 employee count for purposes of determining if your

business will be an “applicable large employer” or not. In addition, your 2013 and 2014

employee count will determine if you are eligible for small employer tax credits.

Fourth, you will need to project what the imposed penalties will be if you do or do not offer

minimum essential coverage. If your business is an applicable large employer, you will be

subject to penalties (starting in 2015) if you do not offer insurance providing minimum essential

coverage and even if you do, you will be subject to lesser overall penalties if some of your

employees receive premium assistance tax credits. It is more likely that your lower income

employees will receive these tax credits.

Fifth, if your business is projected to have 25 or fewer employees, you will need to project your

average wage to determine what the likely employer credit will be.

Sixth, you need to consider not only the direct out-of-pocket costs of providing health insurance

but also the administrative costs associated with doing so. The administrative costs are non-

trivial. They involve explaining the benefits to employees, evaluating and purchasing a policy,

various required notices, W-2 reporting and other expenses as well as potential penalties and

enforcement actions for not properly complying with these administrative requirements.

Seventh, you do not need to offer health insurance to part-time employees to avoid paying a

penalty for failure to offer health insurance but part-time employees count for purposes of

determining whether you are an applicable large employer and therefore subject to the employer

mandate.

http://www.nsba.biz/


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Eighth, you will need to think about why you offer health insurance and evaluate whether

business factors warrant purchasing health insurance for your employees. The primary reasons to

purchase health insurance are (1) employee retention and satisfaction; (2) employee recruitment;

(3) because it is a tax efficient means of compensating employees; and (4) a sense of obligation

to employees. To no small degree, the decision will be a function of labor market conditions in

your region and industry.


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“I know of no method to secure the repeal of bad or obnoxious law so effective as their stringent enforcement.”27

--

Ulysses S. Grant

Implementation Timeline

This section provides a brief timeline of when various major PPACA provisions have been or

will be implemented. Its focus is on matters of importance to small employers and their

employees. These provisions are discussed in detail later in the guide.

2010

Dependent coverage for children under age 26 required

Lifetime limits on essential health benefits prohibited

Preexisting condition exclusions prohibited for those under 19

Rescission prohibited

Small employer health insurance tax credit provided

Coverage of preventative services required

2011

HSA/Archer MSA tax penalty increase

Medical loss ratio (MLR) requirements imposed

OTC drug coverage restrictions in FSAs and HRAs

Small employer simple cafeteria plans established

2012

Summary of benefits and coverage (SBC) requirement

W-2 reporting requirement (cost of employer sponsored health coverage)

2013

Fair Labor Standards Act (FLSA) notice requirement regarding exchanges

Annual limits on essential health benefits prohibited

Flexible Spending Arrangement (FSA) contribution limits reduced

High income Medicare taxes increased

Exchanges start operating (October 1) for 2014 insurance

2014

Individual mandate imposed

Small employer tax credit rate increased and limited to two years

Premium assistance tax credit provided to certain individuals

Health insurance must cover Essential Health Benefits (EHB)


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Cost-sharing limitations imposed

Excessive waiting periods prohibited

Rating limitations imposed (only geography, family status, age (3:1) and tobacco use (1.5:1) permitted)

Preexisting condition exclusions prohibited for all

Guaranteed availability and renewability of coverage

Health insurance tax imposed

2015

Shared responsibility for employers (employer mandate) [Note: This was originally to be effective in 2014]

2016-2017

No major changes of concern to small employers

2018

Tax on high-cost health coverage


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“It is likewise to be observed, that this society [the legal profession] hath a peculiar cant and jargon of their own,

that no other mortal can understand, and wherein all their laws are written, which take special care to multiply;

whereby they have wholly confounded the very essence of truth and falsehood, of right and wrong …”28

--Jonathan

Swift

The “Employer Shared Responsibility” Provisions

In 2015 and thereafter, if an employer has 50 or more employees, the employer generally will be

liable for a penalty under the “employer shared responsibility” provisions of the PPACA if the

employer does not offer insurance meeting PPACA requirements.29

Even if insurance is offered,

if the insurance is deemed “unaffordable” or does not provide “minimum value,” then a penalty

applies. The PPACA actually imposes these penalties starting in 2014 but the administration has

delayed application of these penalties by one year, from 2014 to 2015.30

The IRS regulation implementing this provision defines 44 terms and is over 43,000 words long

and more is to come. So the author asks for the readers’ forgiveness in advance.

Key Point: Starting in 2015, if your business is deemed an “applicable large employer,” it must

provide affordable insurance of specified minimum value or probably pay a penalty. (Overview)

It is important to understand that the number of employees for purposes of determining whether

an employer is an “applicable large employer” subject to the employer mandate is one thing and

the number of employees for purposes of calculating any employer penalty due is something

altogether different.

In reality, this entire “employer shared responsibility” discussion is not terribly relevant for

employers that do not have anything approaching 50 employees. Moreover, the discussion of

which employers are and are not “applicable large employers” is not relevant to firms that

obviously have more than 50 employees and are subject to the employer mandate. These issues

are very important for firms that are near the threshold. Complying with these rules is a major

administrative burden on those firms.

APPLICABLE LARGE EMPLOYERS

The term applicable large employer means an employer that employed 50 or more full-time

employees (including full-time equivalent employees (called FTEs)) during the preceding

calendar year.31

Key Point: Both full-time and part-time employees are considered when determining whether

your business meets the 50 employee threshold for an “applicable large employer” subject to the

employer mandate. (Overview)


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An employer’s status as an applicable large employer for a calendar year is determined by taking

the sum of the total number of full-time employees (including any seasonal workers) for each

calendar month in the preceding calendar year and the total number of FTEs (including any

seasonal workers) for each calendar month in the preceding calendar year, dividing by 12 and

then rounding down to the next lowest whole number. If the result of this calculation is 50 or

more, the employer is an applicable large employer for the current calendar year, unless the

seasonal worker exception applies.32

The employer mandate now applies beginning in 2015.

Because the year preceding 2015 is 2014, 2014 is the relevant year for purposes of initially

determining if an employer is an applicable year employer.

Key Point: The relevant year for determining whether your business is an “applicable large

employer” subject to the employer mandate is 2014 even though the mandate starts in 2015.

(Overview)

FULL-TIME EMPLOYEES

The IRS shared responsibility regulation defines the term full-time employee to mean “with

respect to a calendar month, an employee who is employed an average of at least 30 hours of

service per week with an employer. For this purpose, 130 hours of service in a calendar month is

treated as the monthly equivalent of at least 30 hours of service per week, provided the employer

applies this equivalency rule on a reasonable and consistent basis.”33

It is not, however, really

that “simple.”34

For employees paid on an hourly basis, an employer must calculate actual hours of service from

records of hours worked and hours for which payment is made or due. For employees paid on a

non-hourly basis, an employer must calculate hours of service by using one of the following

methods:

(A) Using actual hours of service from records of hours worked and hours for

which payment is made or due.

(B) Using a “days-worked equivalency” whereby the employee is credited with

eight hours of service for each day for which the employee would be required to

be credited with at least one hour of service using the hourly employee rules.

(C) Using a “weeks-worked equivalency” whereby the employee is credited with

40 hours of service for each week worked for which the employee would be

required to be credited with at least one hour of service using the hourly employee

rules.35

It is not, however, really that “simple” either. If the result of using methods (B) or (C) “would be

to substantially understate an employee’s hours of service in a manner that would cause that

employee not to be treated as a fulltime employee,” then they cannot be used.36

Given the

ambiguity of what that will mean in practice on audit and the incredible mess an employer would

be in if it had to retroactively comply with the “shared responsibility requirements” of the law, it

is doubtful whether it is advisable to utilize these alternative methods included in the IRS

proposed rule.37

Methods (B) and (C) would only understate hours of service if an employer’s

employees on average worked more than an 8 hour day or 40 hour week.


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PART-TIME EMPLOYEES (CALCULATING FULL-TIME EQUIVALENTS)

The number of FTEs for each calendar month in the preceding calendar year is determined by

calculating the aggregate number of hours of service for that calendar month for employees who

were not full-time employees (but not more than 120 hours of service for any employee) and

dividing that number by 120.38

NEW EMPLOYERS

An employer not in existence throughout the preceding calendar year is an applicable large

employer for the current calendar year if it is reasonably expected to employ an average of at

least 50 fulltime employees (taking into account FTEs) during the current calendar year and it

actually employs an average of at least 50 fulltime employees (taking into account FTEs) during

the calendar year.39

This is obviously not a very clear standard given the gravity of the impact if

an employer were deemed an applicable large employer but did not provide coverage (or

adequate coverage). The IRS is seeking comments about whether some safe harbors or

presumption for new employers are appropriate and how they might work.40

SEASONAL EMPLOYERS

If an employer’s workforce exceeds 50 full-time employees for 120 days or fewer during a

calendar year, and the employees in excess of 50 who were employed during that period of no

more than 120 days were seasonal workers, the employer is not an applicable large employer.41

For this purpose, the regulations allow four calendar months to be treated as the equivalent of

120 days.42

AGGREGATION RULES

The aggregation rules represent a potential trap for business owners that have more than one

business. Businesses with common ownership or control may be treated as a single business for

purposes of determining whether the applicable large employer threshold has been met.43

All

employees of the following businesses are treated as employed by a single employer for purposes

of the PPACA:

(1) all corporations which are members of a controlled group of corporations (within the meaning of Internal Revenue Code §1563);

(2) trades or businesses (whether or not incorporated) which are under common control; and

(3) the members of an affiliated service group (with the meaning of Internal Revenue Code §414 (m)).

44

Key Point: Business owners who have an interest in more than one business must carefully

consider the aggregation rules when determining whether your businesses will be treated as a

single “applicable large employer” subject to the employer mandate. (Overview)


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WHAT MUST BE OFFERED

MINIMUM ESSENTIAL COVERAGE

“Minimum essential coverage” means coverage under (1) an employer-sponsored plan, (2)

Medicare, (3) Medicaid, (4) individual health insurance or (5) certain other coverage.45

Employer-sponsored coverage must be “affordable” and provide “minimum value.”46

UNAFFORDABLE COVERAGE

An employee who is offered coverage by an applicable large employer may be eligible for a

premium tax credit or cost reduction if that offer of coverage is not deemed affordable. In

general, an eligible employer-sponsored plan is deemed affordable for an employee if the portion

of the annual premium the employee must pay, whether by salary reduction or otherwise (i.e. the

employee’s required contribution), for his or her own coverage does not exceed 9.5 percent of

the employee’s household income for the taxable year. 47

This affordability calculation is made

using only the cost of insuring the employee not the employee’s dependents (i.e. “self-only”

coverage).48

Key Point: When determining whether employer provided health insurance is affordable for

purposes of the PPACA, the employer need only consider the cost of insuring the employee, not

the employee’s dependents. (Overview)

Serious complexity arises because neither the employer nor the employee know what the

employee’s household income will be in the current year. This matters because applicable large

employers offering coverage are subject to a $3,000 per year per employee penalty for each

employee receiving a premium assistance tax credit. See the discussion under “Penalties” below.

MINIMUM VALUE

An employer-sponsored plan is treated as providing “minimum value” if the plan’s share of the total allowed costs of benefits provided under the plan is at least 60 percent of such costs.

49

These means the plan must be a “bronze health plan” or better (see discussion below of Essential

Benefits and the Metal Levels). HHS provides a minimum value calculator.50

Presumably, health

insurance companies will assist employers in complying with this requirement. Presumably also,

employers will either be able to rely on insurance companies representations or there will be an

independent means of obtaining this information.

WHO ARE EMPLOYEES AND WHICH EMPLOYEES MUST BE COVERED


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Generally, the PPACA regulations adopt the same “common law” definition used for

employment tax purposes. Thus, an employee for payroll tax purposes is almost always an

employee for PPACA purposes.51

The PPACA regulations, however, make it clear that a leased

employee, a sole proprietor, a partner in a partnership, or a 2-percent S corporation shareholder is

not an employee for PPACA purposes.52

Key Point: In general, the PPACA adopts the same definition of employee as used for payroll tax

purposes. However, a leased employee, a sole proprietor, a partner in a partnership, or a 2-

percent S corporation shareholder is not an employee for PPACA purposes. (Overview)

An applicable large employer must offer to all of its full-time employees (and their dependents)

the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored

plan. However, the penalty will not apply unless the employer fails to offer coverage to five

percent or more of its full-time employees (and their dependents) or, if greater, five full-time

employees.53

PENALTIES54

APPLICABLE LARGE EMPLOYERS NOT OFFERING HEALTH COVERAGE

If an applicable large employer fails to offer to its full-time employees and their dependents the

opportunity to enroll in “minimum essential coverage” under an eligible employer-sponsored

plan and at least one of its full-time employees has received a premium assistance tax credit55

or

cost-sharing reduction56

then the employer is subject to a penalty (or excise tax) equal to $2,000

for each full-time employee.57

For purposes of calculating this penalty, however, the number of

full-time employees is reduced by 30.58

Thus, for example, an employer with 70 full-time

employees would pay a penalty of $2,000 times 40 or $80,000.59

This penalty is called an

“assessable payment” in the law. HHS must notify the appropriate health insurance exchange and

the exchange must inform employers if an employee receives a premium assistance tax credit.60

Key Point: Applicable large employers that do not offer health insurance coverage will be

subject to a penalty of $2,000 per employee. (Overview)

Key Point: When calculating the employer penalty due, the full-time employee count is reduced

by 30. Thus, for example, an employer with 55 full-time employees would pay a penalty with

respect to only 25 employees. (Overview)

As with so many things in the PPACA, it is not actually this simple. The full-time employee

count and both this penalty and the penalty imposed on applicable large employers offering

health coverage (discussed in the next section) are actually calculated on a monthly basis.61

The

IRS realizes that this is likely to cause an administrative nightmare for employers, insurers,

exchanges, employees and the IRS itself.62

Accordingly, it has established lookback rules to

enable employers “to predictably identify which employees are full-time employees to whom

coverage must be provided to avoid a potential” penalty.63

These proposed rules, while enabling


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an employer to determine their situation with a fair degree of certainty, are far from simple. In

fact, they are mind numbing. They are set forth in eight pages of microtype in the Federal

Register. 64

These rules are not relevant to determining full-time employee status for purposes of

determining whether an employer is an “applicable large employer” but only for purposes of

calculating the penalty due, if any.65

The rules address (1) ongoing employees, (2) new non-variable hour and non-seasonal

employees and (3) new variable hour and new seasonal employees. They also address the

transition from “new employee” to “ongoing employee,” and employees rehired after termination

of employment or resuming service after some other absence. The regulations also provide for an

optional “administrative period between the standard measurement period and the stability

period” that will not be discussed here.66

The discussion below is a fair description of the rules

but it does abstract away from a number of exceptions and restrictions contained in the actual

underlying rules.

ONGOING EMPLOYEES

Under the look-back measurement method for “ongoing employees,” an employer determines

each ongoing employee’s full-time status by looking back at the “standard measurement period,”

which is a period of months selected by the employer. The determination must be “made on a

uniform and consistent basis for all employees in the same category (see below). If the employee

was employed on average at least 30 hours per week during the employer-selected standard

measurement period, then the employee is a full-time employee during the subsequent period, so

long as he or she remains an employee.67

If an employee was not employed an average at least

30 hours of service per week during the standard measurement period, the employer may treat

the employee as “not a full-time employee” (i.e. a part-time employee) during the “stability”

period that follows which may not be longer than the standard measurement period selected by

the employer.68

The term stability period means a time period selected by an applicable large

employer that follows, and is associated with, a standard measurement period or an initial

measurement period, and is used by the applicable large employer to determine whether an

employee is a full-time employee under the look-back measurement method.69

Key Point: In general, ongoing employees that work an average of at least 30 hours will be

treated as full-time employees for purposes of calculating any penalty owed. (Overview)

Employers may use measurement periods and stability periods that differ either in length or in

their starting and ending dates for the following categories of employees:

(A) Collectively bargained employees and non-collectively bargained employees.

(B) Each group of collectively bargained employees covered by a separate collective

bargaining agreement.

(C) Salaried employees and hourly employees.

(D) Employees whose primary places of employment are in different states.70


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NEW NON-VARIABLE AND NON-SEASONAL EMPLOYEES

If an employee is reasonably expected at his or her start date to be a full-time employee (and is

not a seasonal employee), an applicable large employer that offers coverage to the employee at

or before the conclusion of the employee’s initial three full calendar months of employment will

not be subject to penalty for failure to offer coverage to the employee for up to the initial full

three calendar months of employment. However, if the employer did not offer coverage to the

employee by the end of the employee’s initial three full calendar months of employment, the

employer will be subject to penalty payment for those months as well as for any subsequent

months for which coverage was not offered.71

NEW VARIABLE AND SEASONAL EMPLOYEES

For new variable hour employees and new seasonal employees, applicable large employer are

permitted to determine whether the new employee is a full-time employee using an initial

measurement period of between three and 12 months (as selected by the employer) that begins

on any date between the employee’s start date and the first day of the first calendar month

following the employee’s start date. The employer must determine the new employee’s hours of

service during the initial measurement period and whether the employee was employed on

average at least 30 hours of service per week during this period.72

TRANSITION FROM “NEW EMPLOYEE” TO “ONGOING EMPLOYEE”

Once a new variable hour employee or new seasonal employee has been employed for an entire

standard measurement period, the applicable large employer must test the employee for full-time

employee status. An employee who was employed an average of at least 30 hours per week

during an initial measurement period or standard measurement period must be treated as

a full-time employee for the entire associated stability period. This is the case even if the

employee was employed an average of at least 30 hours per week during the initial measurement

period but was not employed an average of at least 30 hours of service per week during the

overlapping or immediately following standard measurement period. In that case, the applicable

large employer may treat the employee as not a full-time employee only after the end of the

stability period associated with the initial measurement period. If the employee is not employed

an average of at least 30 hours per week during the initial measurement period, but was

employed at least 30 hours per week during the overlapping or immediately following standard

measurement period, the employee must be treated as a full-time employee for the entire stability

period that corresponds to that standard measurement period (even if that stability period begins

before the end of the stability period associated with the initial measurement period).73

Simple.


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REHIRED EMPLOYEES

In general, rehired employees are treated as new employees for purposes of the penalty

calculations only if they had no paid hours for the previous 26 weeks.74

APPLICABLE LARGE EMPLOYERS OFFERING HEALTH COVERAGE

If an applicable large employer offers to its full-time employees and their dependents the

opportunity to enroll in “minimum essential coverage” under an eligible employer-sponsored

plan and at least one of its full-time employees has received a premium assistance tax credit75

or

cost-sharing reduction76

then the employer is subject to a penalty equal to $3,000 times the

number of employees who received a premium assistance tax credit.77

Generally, an applicable

large employer is treated as offering coverage to its full-time employees (and their dependents) if

it offers such coverage to all but five percent of its full-time employees.78

Key Point: Applicable large employers that do offer coverage will be subject to a penalty of

$3,000 per employee who receives a premium assistance tax credit (because the coverage was

not deemed affordable) but that penalty may not exceed what would have been imposed had the

employer not offered insurance at all. (Overview)

This penalty cannot exceed, however, an amount equal to $2,000 times the number of full-time

employees (reduced by 30).79

In other words, the penalty due for employers offering insurance

cannot exceed what they would have paid had they not offered insurance. Thus, for example, an

employer with 70 full time employees, 50 of whom received a premium assistance tax credit,

would pay a tentative penalty of $150,000 but because of this limitation, its actual penalty would

be limited to $80,000.80

HHS must notify the appropriate health insurance exchange and the exchange must inform

employers if an employee receives a premium assistance tax credit.81

Employees are only allowed a premium assistance tax credit if the coverage provided is deemed

unaffordable. In general, an eligible employer-sponsored plan is deemed affordable for an

employee if the portion of the annual premium the employee must pay, whether by salary

reduction or otherwise (the required contribution), for his or her own coverage does not exceed

9.5 percent of the employee’s household income for the taxable year. 82

Key Point: Employees are only allowed a premium assistance tax credit if the coverage provided

is deemed unaffordable. In general, an eligible employer-sponsored plan is deemed affordable

for an employee if the portion of the annual premium the employee must pay, whether by salary

reduction or otherwise (the required contribution), for his or her own coverage does not exceed

9.5 percent of the employee’s household income for the taxable year. (Overview)

Household income means the modified adjusted income of the taxpayer, the taxpayer’s spouse

and any dependents. Modified adjusted income means adjusted gross income plus any amount

excluded from gross income under Internal Revenue Code section 911(relating to foreign source

wages or salary) and any tax-exempt interest received.83

Serious complexity arises because


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neither the employer nor the employee know what the employee’s household income will be in

the current year.

The IRS “Shared Responsibility” regulations provide three safe harbors so employers can meet

the affordability requirements without having to guess their employees’ household income for

the current year. The safe harbors are (1) the Form W–2 safe harbor, (2) the rate of pay safe

harbor and (3) the federal poverty line safe harbor. The employer may rely on one or more of

these safe harbors.

Key Point: The IRS provides three safe harbors so an employer does not have to guess its

employees’ household income for purposes of determining whether the employer’s health

insurance will be deemed affordable. (Overview)

THE FORM W–2 SAFE HARBOR

An employer that offers minimum value coverage will not be subject to a penalty if an

employee’s required contribution for the calendar year for the employer’s lowest cost employee-

only plan does not exceed 9.5 percent of that employee’s Form W–2 gross wages from the

employer for the calendar year. Application of this safe harbor is determined after the end of the

calendar year and on an employee-by employee basis. In addition, to qualify for this safe harbor,

the employee’s required contribution must remain a consistent amount or percentage of all Form

W–2 wages during the calendar year. A periodic contribution that is based on a consistent

percentage of all Form W–2 wages may be subject to a dollar limit specified by the employer.84

THE RATE OF PAY SAFE HARBOR

An employer that offers minimum value coverage will not be subject to a penalty if an

employee’s required contribution for the cal

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