Wednesday, July 20, 2016

Obamacare's three "affordability" safe harbors

The Affordable Care Act (aka "Obamacare") is complicated, but generally it requires large employers to provide "affordable" health insurance to their employees (or else pay huge fines).

So, what does "affordable" mean? Per the IRS's Q&A sheet, "If an employee’s share of the premium for employer-provided coverage would cost the employee more than 9.5% of that employee’s annual household income, the coverage is not considered affordable for that employee."

Okay... but if I'm an employer, how in the heck am I gonna know my employees' "household incomes"? You probably won't.

Ummm, do you see the problem here? Yes, but fear not! The IRS has identified three safe harbors:

(1) the Form W-2 wages safe harbor,
(2) the rate of pay safe harbor, and
(3) the federal poverty line safe harbor.

In other words, you just make sure the employee contribution is below 9.5% of: their own W-2 income; the employee's "rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased)" (multiply the rate by 130-hours); or the federal poverty line.

I guess it's nice to have these safe harbors, but they seem to necessarily require capping the employee contribution at a lower rate than would otherwise be allowed. You can read the regulations here.