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Small Business Employee Benefits and HR Blog

FAQ: Is Our Health Coverage Considered Affordable?

affordabilityThe Affordable Care Act’s (ACA’s) employer shared responsibility provision requires applicable large employers to either provide “affordable” coverage to employees starting in 2014 or pay a fine. What makes coverage affordable for employees? For 2015, the definition of affordability is set at 9.56 percent.

What is the Employer Shared Responsibility?

The employer shared responsibility provision, also called ESR or the employer mandate, is the requirement for larger employers to either offer health insurance to employees, or pay a fee if/when an employee receives a premium tax credit for health insurance through the Marketplace.

2015 is a "phase-in" year for the employer shared responsibility. In 2015, there is transition relief available for some employers with 50-99 full-time equivalent (FTE) employees. In 2015, if an applicable large employer does not offer “minimum essential” and affordable coverage to 70 percent of their full-time employees (and their dependents), the employer would be subject to the employer shared responsibility. The employer would have to pay the fee if one of their employees purchases a health plan through the Marketplace a receives a premium tax credit.

How Does an Employer Know Whether the Coverage It Offers Is Affordable?

In 2015, an employer’s coverage is considered affordable if an employee’s share of the premium for the employer-sponsored health insurance would not cost the employee more than 9.56 percent of their household’s income. Since employers are generally not aware of their employees’ household incomes, employers may also take advantage of one of the three affordability safe harbors. (More on safe harbors below.)

If an employer meets the requirements for any of the safe harbors, their offer of coverage will be considered affordable for the purposes of the ESR, regardless of whether it was affordable to the employee for premium tax credit purposes.

What Are the Affordability Safe Harbors?

The three affordability safe harbors include: 1) the Form W-2 wages safe harbor, 2) the rate of pay safe harbor, and 3) the federal poverty line safe harbor.

1. The Form W-2 wages safe harbor may calculate the affordability of the offered coverage based solely on wages paid to the employee by the employer. In other words, the safe harbor is generally based on the amount of wages paid to the employee that are reported in Box 1 of the employee’s Form W-2.

2. The rate of pay safe harbor is generally based on the employee’s rate of pay at the beginning of the coverage period for an hourly employee. For an hourly employee, an employer uses an assumed rate of 130 hours per calendar month multiplied by an hourly employee’s rate of pay, under this safe harbor.

3. The federal poverty line (FPL) safe harbor generally treats the coverage as affordable if the employee contribution does not exceed 9.5 percent of the FPL for a single individual for the applicable calendar year.

See here for more information on health coverage affordability.

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