The Employer’s Dilemma: Determining Whether Coverage is “Affordable” under the PPACA

The Patient Protection and Affordable Care Act (“PPACA”) imposes many demands upon employers. To avoid penalties under the PPACA, an applicable large employer will need to provide “minimum essential health benefits coverage” for all full-time employees that is both “affordable” and provides “minimum value.” So what exactly is “affordable” health insurance coverage?

The PPACA explains that coverage is “affordable” if an employee’s annual contribution to his/her health coverage is less than 9.5% of that employee’s annual household income. Now you might be asking yourself — what if my business offers a range of plans and an employee chooses the most expensive possible plan, placing the employee contribution above the 9.5% annual income threshold? The PPACA assists employers by allowing them to measure affordability based on the lowest cost plan that is available to a particular employee for self-only coverage. This means that the affordability requirement does not take dependents of an employee into account even if that employee must provide those dependents with health insurance coverage.

The PPACA measures affordability based on annual household income. Even if coverage is not affordable for an employee based on his/her income, coverage might be affordable for an employee with more than one job and/or more than one wage earner residing in the household. The dilemma for employers lies in determining whether they should rely on other potential income streams to estimate affordability for lower income employees. Without detailed information about an employee’s household income, an employer would run the risk of overestimating household income and being exposed to the PPACA’s penalties. Moreover, it is very unlikely that most employees will volunteer information regarding their household income.

Employers seeking to be sure that they have implemented an “affordable” health insurance option for employees are left with several options. The PPACA provides three safe harbors that will allow employers to claim that their plans are “affordable.” First, if the employee contribution towards the lowest cost self-only coverage does not exceed 9.5% of the employee’s wages listed in Box 1 of his/her Form W-2, then the coverage will be deemed to be affordable.   Second, coverage is affordable if the employee contribution does not exceed 9.5% of the employee’s hourly rate of pay times 130, or the employee’s monthly salary.  The third safe harbor provides that coverage is affordable if the employee contribution does not exceed 9.5% of the most recently published federal poverty level for a single individual. In 2013, the federal poverty level for the contiguous United States for a single individual was set at $11,490.

About Jim Hamilton

I am an employee benefits partner with Bose McKinney & Evans LLP. My broad-based practice covers health and welfare arrangements, insurance, executive compensation and federal and state taxation. Among other areas, I have specific experience with PPACA, HIPAA, COBRA, ERISA and numerous other state and federal laws affecting employee benefit plans.
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