IRS Confirms W-2 Safe Harbor to Determine Plan Affordability

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The employer mandate, effective beginning in 2014, requires employers with 50 or more employees to pay a penalty if certain conditions are not met. One of these conditions is to provide affordable coverage. Coverage is considered to be affordable if an employee’s required contribution does not exceed 9.5% of the employee’s household income – something that is not readily accessible by employers. As previously reported, the IRS proposed a safe harbor that would allow employers to use the W-2 wages of an employee to determine whether coverage is affordable for purposes of the employer mandate, instead of using household income. In Notice 2012-58, The IRS confirms that the Form W-2 safe harbor will be available to employers to determine affordability with respect to the employer penalty provisions, at least through 2014. To take advantage of the safe harbor, employers must offer full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an employer-sponsored plan, and ensure that the employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value does not exceed 9.5% for the employee’s W-2 wages. Application of the safe harbor would be determined after the end of the calendar year and on an employee-byemployee basis, taking into account the employee’s particular W-2 wages and contribution. The safe harbor can also be used prospectively, at the beginning of the year, by structuring the plan to set the employee contribution at a level that would not exceed 9.5% of the employee’s W-2 wages. It is important to note the safe harbor only applies for purposes of determining whether an employer’s coverage satisfies the affordability test for purposes of the employer mandate – it would not affect an employee’s eligibility for a premium tax credit, which continues to be based on the affordability of employer-sponsored coverage relative to an employee’s household income. Thus, in some cases, this means that an employer’s offer of coverage to an employee could be considered affordable based on W-2 wages for purposes of determining whether the employer is subject to a penalty under the employer mandate, and the same offer could be treated as unaffordable based on household income for purposes of determining whether the employee is eligible for a premium tax credit (i.e., no penalty even though the employee receives subsidized coverage in the Exchange). Although the guidance is helpful to employers and will make it easier to look at contribution structures for benefit programs in 2014, further guidance is still needed in several areas, including what constitutes a “minimum value” plan, and what constitutes providing coverage to “substantially all” full-time employees in order to avoid the application of the penalty that applies with respect to not offering coverage.

Employers up estimated costs of health care reform law

Original article from

By Jerry Geisel

Employers are upping their estimates of how much the health care reform law will increase costs, according to a Mercer L.L.C. survey released June 12.

Two years ago, 25% of employers thought that complying with the Patient Protection and Affordable Care Act would increase their health care plan costs by less than 1%. But now, just 9% of nearly 900 employers surveyed by Mercer expect a cost increase that small.

Similarly, 15% of employers in 2011 expected the health care reform law to increase costs by at least 5%. Now, 19% of employers expect cost increases of at least 5%. In addition, 21% are projecting 2014 health care reform law related cost increases of 1% to 2%, while 18% expect cost increases of 3% to 4%; 32% of respondents said they didn't know the cost impact.

Mercer executives said there are several reasons why more employers are increasing their cost estimates.

“As employers get closer to implementation, they have a better idea of how many additional employees will become eligible for coverage. Some that thought they would cut hours have changed their position on that,” Beth Umland, Mercer's director of research for health and benefits in New York, said in an email.

Under PPACA, employers will be liable for a $2,000-per-employee penalty if they do not provide coverage starting next year to full-time employees, or those working an average of 30 hours a week.

In addition, Ms. Umland said, some employers in 2011 didn't know about the various fees that the health care reform law imposes. For example, employers will have to pay a fee of $63 per health care plan participant in 2014 to fund a program that will partially reimburse health insurers for providing coverage to high-cost individuals. While there was some awareness of the Transitional Reinsurance Program, it wasn't until last year that regulators announced the size of the fee employers would have to pay.

Check out our HCR Central for FREE PPACA Downloads, FAQ's, and compliance news to help you and your company prepare for PPACA requirements that take effect later this year and in 2014.


Health law’s mandate, tax credit could help or hurt employers

Original article

By Andrew Hedlund – Medill News Service

Business owners view the new health care law through many different paradigms. Some see it as onerous, while others find it helpful. Research suggests that one of its most contentious provisions, the employer mandate, will have minimal impact.

Joe Olivo is a small business owner who finds the new health care law costly and confusing, particularly next year’s employer mandate. Mark Hodesh is a small business owner who finds the law to be a boon to his business.

Some business owners like Hodesh, the owner of Downtown Home and Garden in Ann Arbor, Mich., qualify for the tax credit, which is available to businesses with fewer than 25 employees to offer health insurance, and do not worry about the mandate, which only kicks in at the 50-employee mark.

Others like Olivo, who is a co-owner of Perfect Printing in Morristown, N.J., do not qualify for the credit and say the requirement that businesses with more than 50 employees must provide health insurance or face fines prevents them from growing.

Starting next year, employers that have 50 or more workers that are full-time, defined in the law as those working more than 30 hours a week, are required to provide coverage for their workers. For those with fewer than 25 employees, they receive a tax credit now of 35 percent of the cost of their employee health insurance costs, and that will increase to 50 percent next year. According to the Congressional Research Service, more than 90 percent of businesses had fewer than 50 employees.

Olivo’s business has 40 full-time employees and offers health insurance. With that number of full-time workers, he will not be subject to the mandate, but it gives him pause when deciding whether to expand the business.

In fact, Olivo is purposely avoiding hitting the 50-employee mark. Any new employees he hires work on a part-time basis. This decision is rooted in the uncertainty surrounding health care costs.

“If I see premiums are not going through the roof,” he said, “and I see there is a stable known situation where I can reasonably expect what will happen, I will have a better incentive to take the risk with my money and grow.”

What he has seen so far is not promising though, he said.

“(What) we’ve already started to see is how the regulation, the amount of work, for a company just under 50 employees,” Olivo said, “that we have to decide to make sure we’re in compliance — start looking at our employee’s hours, making sure we don’t go over the 50 mark because of the severe ramifications,” referring to law’s penalty of $2,000 per employee for any companies with 50 or more employees that don’t provide health insurance. The penalty would not apply to the first 30 employees.

Olivo also said the lack of finality in the IRS’s rules further confuses employers as 2014 draws closer. The agency will hold a public hearing on this provision Tuesday.

However, research on similar employer requirements in San Francisco and Massachusetts by the Urban Institute, National Bureau of Economic Research and the National Opinion Research Center found that the notion the requirement to provide insurance would lead to job loss or could lead to fewer employers offering health insurance was overstated.

In fact, the National Opinion Research Center found in its 2008 study that businesses with three or more employees offering health insurance in Massachusetts increased from 73 percent to 79 percent, though employers were less inclined to consider terminating coverage than national companies.

A study sponsored by the National Bureau of Economic Research found that, based on San Francisco’s efforts, employers nationwide will be less likely to choose the penalty option of this requirement because the Affordable Care Act lacks a public option. San Francisco does offer the equivalent of a public option, which some employers may find preferable.

Elise Gould, a health care economist at the Economic Policy Institute, said she expects the effects of the employer mandate to be minimal.

“I don’t think that it is going to lead to much job loss,” she said. “There may be some shifting in hours to avoid the mandate. I think that would be small though.”

Gould also added that she expects employers to take many different factors into account when considering expansion, with the insurance requirement being just one small factor.

The law attempts to aid small businesses with tax credits as well, though several restrictions come with them: firms must have fewer than 25 employees and pay them less than $50,000 in wages each year, meaning Olivo’s business is ineligible for a credit while Hodesh’s business qualifies.

He met the requirements and received a tax credit, allowing him to hire another employee.

Hodesh has 12 employees so he doesn’t need to worry about crossing the mandate’s 50-employee threshold soon.

“There are pluses and minuses to all issues,” Hodesh said. “And I think that people are focusing on the minus side of the requirements of the Affordable Care Act. They are missing out on all the positives of the law.”

Offering health insurance to his employees is also an important strategy for his store.

“We provide health care as a business tool,” Hodesh said. “We attract and keep good long-term employees, and we don’t have high turnover and we don’t have to train a lot.”

Starting around 2000, though, his company’s health care costs tripled, but the tax credit eased that cost.

“(The credit) gave us the confidence to hire a new person,” he said. “It’s a good deal for me.”


IRS Offers Some Help with 'Pay or Play' Proposal

The IRS kicked off 2013 with a little relief for some employers under the Patient Protection and Affordable Care Act (PPACA).

The proposed guidance, released Dec. 28, 2012, eases some of the penalties for larger employers who fail to provide adequate health care coverage for all their full-time employees. The PPACA "pay or play" penalty -- $2,000 per full-time employee for employers with at least 50 workers as of Jan. 1, 2014 -- will not apply as long as the employer covers at least 95 percent of their full-time employees and their dependents up to age 26, according to Littler Mendelson PC.

The proposed guidance clears up questions that have lingered since the inception of the law in 2010, according to a report in Business Insurance. As it was originally written, any employee with a large employer who opted to receive a premium subsidy under the PPACA-created health care exchanges instead of taking the employer-sponsored coverage might trigger the penalty for the employer. The 95 percent rule would give employers a little wiggle room in case a handful of employees decided to take the subsidy.

These proposed rules also would provide flexibility in the event that part-time employees who take the premium subsidy occasionally accrue hours that temporarily push them into full-time status, according to the Business Insurance report.

In addition to the 95 percent rule, the IRS handed out a few other surprises for employers, according to the law firm of Kilpatrick Townsend & Stockton LLP. For instance, the guidance would:

  • Require coverage of full-time employees and dependents under age 26, but not of spouses.
  • Aggregate employers in a controlled group (common ownership) to determine if an employer is subject to the penalty. However, if an employer is subject to the penalty, the calculation of the fine is applied to each employer separately in a controlled group -- meaning "one member's failure will not affect the other members of the group."


While the "pay or play" penalty doesn't go into effect until next year, employers need to start tracking their employees' status now, advises Kevin R. McMurdy, an attorney with Fox Rothschild.

"The release of this information continues to underline the importance of counting employees and measuring their hours to see if they are full- or part-time under the definitions provided in PPACA," McMurdy wrote in Employee Benefit News. "Employers should start counting now and avoid any last-minute confusion over their status or their obligations. As more guidance is issued, we can fine-tune these measurements, but don't get caught short at year-end having failed to manage your population."

The IRS currently is taking public comments on the rules through March 18 and plans to conduct a hearing in April to further explore these proposals.


Health Care Reform Update: IRS Proposes Regulations on Employer Penalty

The Internal Revenue Service has released proposed regulations on the health care reform employer "shared responsibility" penalty provision. This is the penalty on "large" employers (those with at least 50 full-time or full-time equivalent employees) that do not provide affordable minimum essential coverage for full-time employees and their dependents and have at least one full-time employee who receives subsidized Exchange coverage (new Internal Revenue Code section 4980H, enacted as part of the Patient Protection and Affordable Care Act of 2010 as amended by the Health Care and Education Reconciliation Act of 2010). The IRS also posted on its website a set of related questions and answers.

Employers Affected

An employer meets the penalty provision's large employer threshold if it employed, on average, at least 50 full-time or full-time equivalent employees in the prior calendar year. Thus, for 2014, the first year the penalty is effective, an employer would consider the average number of such employees it had during 2013 to determine whether it is a covered large employer. The proposed regulations include a transition rule under which employers may use any consecutive six-month period in 2013, instead of the full year, to calculate the average number of employees.

A full-time employee is one who is employed by the employer an average of 30 hours per week. Part-time employees count, too, taking into account the number of full-time equivalents: For a given month, add the number of hours for all part-time employees (counting no more than 120 hours for any one employee) and divide by 120. Count all hours worked and all hours for which payment is made or due for vacation, illness, holiday, incapacity, layoff, jury duty, military duty, or leave of absence. Notice 2011-36 had limited the period of leave that must be included to 160 hours but the proposed regulations eliminate this limitation.

The proposed regulations clarify that the IRS's safe harbor for determining full-time status (i.e., using the look-back/stability period approach) will not apply for purposes of determining whether an employer meets the threshold of 50 full-time employees. Instead, whether an employer is a large employer for a given year will be determined by calculating employees' actual hours of service in the immediately preceding year. Equivalency rules may be used for employees not paid on an hourly basis. An entity not in existence in the preceding year may be a large employer in its first year if it is reasonably expected to employ an average of at least 50 full-time employees during its first year. Special hours-counting rules are proposed for educational institutions, employees paid on a commission basis, and other circumstances.

Whether a worker is an employee of a particular employer will be based on the long-standing common law principle that, if a service recipient has the right to direct and control how a worker performs services, that service recipient is the worker's employer. The proposed regulations also reiterate that controlled group rules apply for purposes of identifying the employer. Thus, all common law employees of all entities that are part of the same controlled group or affiliated service group must be counted to determine whether the threshold of 50 full-time employees is met.

Assessable Penalty for Affected Employers

For a given month beginning after 2013, if an employer does not offer minimum essential coverage to "substantially all" of its full-time employees and their dependents and a full-time employee obtains subsidized Exchange coverage, the employer must pay a penalty equal to $166.67 multiplied by the number of its full-time employees in excess of 30. Under the proposed regulations, "substantially all" means all but five percent of full-time employees or, if greater, five full-time employees. The proposed regulations define "dependent" as a child, within the meaning of Code 152(f)(1), who is under age 26. (Thus, a spouse is not a dependent.) The proposed regulations offer transitional relief (only for 2014) for employers that do not currently provide dependent coverage. Any employer that takes steps during its plan year that begins in 2014 toward offering dependent coverage will not be liable for penalties solely on account of its failure to offer dependent coverage for that plan year. The proposed rules also explain that the 30-employee reduction used when calculating this penalty is applied on a controlled group basis so that each member company reduces its number of full-time employees by a ratable share of 30.

If an employer offers minimum essential coverage to substantially all of its full-time employees and their dependents, but a full-time employee nevertheless obtains subsidized Exchange coverage (i.e., because the employer's coverage fails to meet the minimum value or affordability test), the employer must pay a penalty equal to the lesser of the penalty determined in the preceding paragraph or $250 multiplied by the number of full-time employees who are certified as having subsidized Exchange coverage for the month.

Since no penalty is triggered unless at least one full-time employee obtains subsidized Exchange coverage, it is important to know whether a full-time employee can obtain subsidized Exchange coverage. An employee can obtain subsidized Exchange coverage only if his or her household income is between 100 percent and 400 percent of the federal poverty line, he or she enrolls in Exchange coverage and is not eligible for Medicaid (or other government coverage), and either no employer coverage is offered or the employer coverage offered fails to meet either a minimum value test or an affordability test:

  • Employer coverage meets the minimum value test if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. The Department of Health and Human Services is working with IRS to develop a calculator that employers may use to determine whether this test is met.
  • Employer coverage meets the affordability test if the employee is required to pay no more than 9.5% of his household income for self-only coverage. Since employers have no practical way of knowing what an employee's household income is, the IRS previously stated that employers could use an employee's W-2 reported wages as a safe harbor. The proposed regulations explain how that safe harbor would apply, including how it would apply to partial years worked. The W-2 safe harbor will be very useful to most employers, but the proposed regulations also offer two additional safe harbors that employers may use to determine affordability: one based on monthly rate of pay (i.e., coverage is affordable if the employee's monthly cost for self-only coverage does not exceed 9.5% of his monthly rate of pay) and the other based on eligibility for Medicaid (i.e., coverage is affordable if the employee's cost for self-only coverage does not exceed 9.5% of the federal poverty line for a single individual).

If an employee elects coverage under an employer's group health plan, the employee cannot qualify for subsidized Exchange coverage even if the employer coverage fails the minimum value or affordability test. However, providing mandatory group health coverage that fails the minimum value or affordability test will not prevent an employee from obtaining subsidized Exchange coverage.

The proposed regulations retain the look-back/stability period safe harbor method provided in prior guidance for determining which employees are full-time for purposes of the penalty calculation. Thus, an employer can use a look-back period of up to 12 months to determine whether an on-going employee (i.e., one employed for at least the length of the look-back measurement period selected) is a full-time employee. If an employer uses a look-back/stability period for its on-going employees, it also can use the look-back/stability period for new and seasonal employees. The proposed regulations include additional special rules for a new variable-hour employee or seasonal employee whose status changes during the look-back measurement period, for rehired employees and employees returning from unpaid leaves of absence, for employees of temporary agencies, and for other special circumstances.

The proposed regulations assure that an employer will (a) receive certification of an employee's receipt of subsidized Exchange coverage and (b) have an opportunity to respond regarding application of the penalty before IRS actually assesses a penalty in connection with that employee.

Recordkeeping obviously is important both for compliance (existing law already requires substantial recordkeeping for tax purposes) and to substantiate any defense to a penalty.

Opportunity to Comment on Proposed Regulations

Employers and other stakeholders can help shape final regulations at a public hearing on April 23, 2013, and by submitting written comments by March 18, 2013. In addition, the government also requests comments on the new Code § 6056 employer-reporting requirements and the 90-day waiting period rule.