A major provision of the Employer Mandate is the Employer Shared Responsibility payment, which kicks in when a company does not offer health coverage, or it offers coverage to fewer than 95% of its full-time employees and their dependents. The payment is assessed even if only one of those full-time employees receives a premium tax credit on an Exchange. The shared responsibility payment also applies even if an employer provides coverage to at least 95% of its full-time employees, and one employee receives a tax credit to pay for coverage on an Exchange, because the employer plan was not affordable, or the coverage did not provide minimum value.
The final regulations from the IRS and Treasury Department, however, provide three affordability safe harbor provisions for employers. The Affordable Care Act considers a plan affordable if your employees’ contributions are less than or equal to 9.5% of their household income. The safe harbors, which are optional, are available because employers will not always know their employees’ household incomes. This can be a huge obstacle for determining whether your company’s health care plan is affordable or not.
The three optional safe harbors are:
- The Form W-2 Safe Harbor: This safe harbor, as its title suggests, based on the wages listed in Box 1 of an employee’s W-2 form. As long as the employee’s required plan contribution for the calendar year does not exceed 9.5% of wages, the employer satisfies the Form W-2 Safe Harbor. At the end of the calendar year, check your employees’ wages and their required contributions. To be eligible, your employees’ required contributions have to be consistent for the entire calendar year.
- The Rate of Pay Safe Harbor: This type of safe harbor is based on hourly employees’ rate of pay at the start of the health care coverage period, and it applies even if the employees’ rate of pay decreased. To determine eligibility for this safe harbor, take an employee’s lowest rate of pay for the month coverage began; multiply that rate by 130 (the number of hours it takes for an hourly employee to be full-time for a month’s duration); and then determine affordability if the employee’s contribution is equal to or lower than 9.5% of that month’s wages.
- The Federal Poverty Line (FPL) Safe Harbor: Coverage is considered affordable under this safe harbor if an employee’s contribution (for the year) doesn’t exceed 9.5% of the federal poverty line for a single individual in that calendar year. This safe harbor is ideal for employers of workers whose wages are too low to qualify for Exchange subsidies.
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