On July 24, 2014, the Internal Revenue Service (IRS) released three Revenue Procedures (2014-46, 2014-37, and 2014-41), which provide guidance to individuals on their obligation to maintain minimum essential coverage (MEC) under the Affordable Care Act’s (ACA) so-called “individual mandate.” Most notably for employers is that, in Revenue Procedure 2014-37, the IRS increased the threshold for determining whether an employer has offered affordable coverage to an employee. For these purposes, the IRS increased the percentage of an employee’s household income that can be charged for group health insurance and still be considered affordable for purposes of the ACA’s “pay-or-play” requirements. The IRS guidance increases the percentage from 9.5% to 9.56%. In other words, an employer assessing the affordability for employee-only coverage for its least expensive plan in 2015 can require an employee to pay up to 9.56% of his or her household income and the insurance will still be considered affordable.
It has been widely reported that the IRS has increased the affordability percentage in all cases from 9.5% to 9.56%. This is not necessarily true. By way of background, the IRS had previously acknowledged that when it comes to having employers measure “affordability” of health coverage, tracking an employee’s household income would be difficult, if not impossible. Responding to this concern, the IRS released regulations that permitted employers to use one of three safe harbors to determine affordability. The three safe harbors permit an employer to measure affordability based on whether the applicable premium exceeds 9.5% of W-2 income, an employee’s Rate of Pay or a measure of the Federal Poverty Level. That is, an employer using one of the safe harbors would not need to ask about an employee’s household income to determine whether the insurance is affordable for purposes of the ACA; it would simply take the applicable safe harbor, multiply by 9.5% and measure the result against the premium for self-only coverage. Some vendors, consultants and others have announced that employers can now use the increased 9.56% to determine whether coverage is affordable for purposes of the safe harbor. Based on the literal regulatory rules, this is not correct. The reason this is not true is that the IRS regulations on affordability have “hard-wired” the 9.5% standard into those regulations; the regulations do not cross-reference to the statutory reference for affordability. As the IRS continues to index the affordability measure for household income over time, as is required by the ACA, a concomitant change to the percentage established in the regulations will be required or else these two percentages will very quickly become dramatically out-of-sync.
Some type of announcement from the IRS increasing the regulatory 9.5% threshold to the statutory 9.56% threshold for the applicable safe harbors would be welcome. In the meantime, employers planning on complying with the regulatory safe harbor rules should cap premiums based on the literal terms of those regulations.