United States: IRS' Final Employer Shared Responsibility Rules: What Is "Affordable, Minimum Value" Coverage?

Earlier this year, the IRS issued final regulations that provide additional guidance on the employer shared responsibility rules (also called the "pay or play" rules) that will generally apply to employers' group health plans beginning in 2015 under the Patient Protection and Affordable Care Act of 2010 (i.e., the ACA or ObamaCare). Under the ACA, an applicable large employer may be required to pay an employer shared responsibility penalty if it fails to offer affordable, minimum value health coverage to substantially all of its full-time employees and their dependents. Critical to these penalty provisions is the determination of what qualifies as "affordable, minimum value" health coverage. This newsletter describes what it means for an applicable large employer to provide such coverage to its eligible full-time employees. For more information about other aspects of these final rules, including details about the potential penalties, please refer to our related "Pay or Play Rules" newsletters.

What is "Minimum Value" Coverage?

An employer's health care plan provides "minimum value" for purposes of the employer shared responsibility rules if the plan pays at least 60 percent of the total allowed cost of health care benefits provided to eligible plan participants. Regulations issued by the Department of Health and Human Services (DHHS) define a plan's minimum value percentage as: (1) the plan's anticipated covered medical spending for "essential health benefits" for a standard population of participants, that is (2) determined in accordance with the plan's cost-sharing structure, and (3) divided by the total anticipated costs of the essential health benefits provided to that standard population group.

When determining whether a plan provides minimum value, an employer may take into account any amounts it contributes to a participant's health savings account (HSA). For example, if an employer's HSA-eligible health plan has a $1,500 deductible, and the employer makes an annual $500 contribution to its employees' HSAs, the plan will be treated as having a $1,000 deductible for purposes of determining minimum value. In addition, health reimbursement account (HRA) amounts may be taken into account when determining minimum value when they are first made available for the participant's use, provided that they are used only for the participant's cost-sharing, and not to pay insurance premiums. Finally, although wellness program incentives generally are not taken into account when determining whether a plan provides minimum value, costs for programs designed to reduce or prevent tobacco use may be included in the calculation.

Recognizing that it may be difficult for employers to calculate a health plan's minimum value percentage, the DHHS regulations include several alternative approaches for determining whether the plan provides minimum value:

Minimum Value Calculator. The DHHS and the Department of Treasury have developed a "minimum value" calculator that allows an employer to enter certain information about the benefits offered by the plan, its covered services, and cost-sharing requirements. The calculator will use this information to calculate the plan's minimum value percentage.

Design-Based Safe Harbors. The DHHS and the Department of Treasury are also developing designed-based safe harbors intended to give employers a simple method for determining whether a plan provides minimum value, but without the need to perform calculations. If the features of the employer's plan (such as deductibles, out-of-pocket maximums, cost-sharing limits, etc.) mirror those of one of the design-based safe harbors, then the employer's plan will be deemed to provide "minimum value."

Use of a Certified Actuary. If a plan's features don't lend themselves to use of either the minimum value calculator or a design-based safe harbor, then the employer may use a certified actuary to determine the plan's minimum value percentage.

Special Rule for Small Group Plans. If a small group plan satisfies the requirements for any of the levels of "metal" coverage provided for under the ACA (i.e., a "bronze," "silver," "gold," or "platinum" plan), then it will be treated as providing "minimum value."

Is the Coverage "Affordable"?

Under Section 36B of the Internal Revenue Code, an employer's health plan is "affordable" if a full-time employee's required contribution for the lowest-cost, self-only coverage ("qualifying coverage") offered by the plan does not exceed 9.5 percent of the employee's total household income for the taxable year. In most cases, however, an employer won't know the employee's household income for the year. To address this problem, the employer shared responsibility rules include three safe harbors employers can apply to determine whether the coverage is "affordable": the "Form W-2" safe harbor; the "rate of pay" safe harbor; and the "Federal poverty line" safe harbor.

Using the Safe Harbors

Employers may elect to use one or more of the affordability safe harbors, and may use different safe harbors for different categories of employees. The categories must, however, be reasonable, and the employer must apply the safe harbor used with each particular category on a uniform and consistent basis with respect to all employees included in such category. Reasonable categories include specified job categories; nature of compensation (for instance, salaried vs. hourly employees); geographic location; and similar bona fide business criteria. Simply listing employees by name is not considered a reasonable category, however.

(1) The Form W-2 Safe Harbor

Under the "Form W-2" safe harbor, a plan is deemed to provide affordable coverage if an employee's required contribution for qualifying coverage doesn't exceed 9.5 percent of the employee's Box 1, Form W-2 wages from the employer (and any wages paid to the employee by other members of the employer's controlled group or affiliated service group) for the calendar year. Pre-tax reductions to an employee's compensation (such as 401(k) contributions or health plan contributions) are not added back to the employee's Form W-2 wages when determining whether the safe harbor is satisfied.

An employer's use of the Form W-2 safe harbor is contingent on the employer meeting the requirements set forth below. These requirements may make using this safe harbor unpalatable to some employers.

  • The Form W-2 safe harbor is applied at the end of the calendar year, using that calendar year's wages, on an employee-by-employee basis. Accordingly, an employer will need to consider the effect of unpaid leaves of absences on the employer's ability to satisfy this rule.
  • An employee's required contribution must remain constant during the entire calendar year (or plan year, if a non-calendar year is used) – either as a consistent flat dollar amount, as a consistent percentage of the employee's wages, or as a combination of the two (for example, X percent of compensation, but no more than $XX in total) .
  • The employer cannot make discretionary adjustments to an employee's contributions for any particular pay period to ensure that the 9.5 percent limit is met.
  • For employees not offered coverage for the entirety of the year, the employer can only take into account the employee's Form W-2 wages for the partial year during which the employee was offered coverage.

(2) The Rate of Pay Safe Harbor

The "rate of pay" safe harbor generally permits a plan to charge full-time employees no more than 9.5 percent of their rate of pay for qualifying coverage. The application of this safe harbor varies for hourly and salaried employees.

  • For hourly employees, the rate of pay safe harbor is met if the employee's required contribution for the month does not exceed 9.5 percent of the employee's hourly rate of pay multiplied by 130 hours. The hourly rate of pay is determined at the beginning of the plan year, or at the time of the employee's enrollment in the plan, if later. In addition, if an employee's hourly rate of pay is reduced after the coverage period begins, then that reduced rate must be used for the month in which the reduction occurs. (Requiring employers to use an employee's lowest hourly rate of pay for the month is intended to discourage employers from lowering their employees' rate of pay after the start of the coverage period.)
  • For salaried employees, the rate of pay safe harbor is met if the employee's required contribution for the month does not exceed 9.5 percent of the employee's monthly salary. For this purpose, the employee's monthly salary is determined at the beginning of the year, or at the time of the employee's enrollment in the plan, if later. The rate of pay safe harbor is not available if a salaried employee's pay is reduced during the month, even if the reduction is due to a reduction in the employee's work hours.

To simplify use of the rate of pay safe harbor, employers may elect to use the State minimum wage as a proxy for the employee's rate of pay. For example, for Wisconsin hourly employees, an employer could use Wisconsin's current minimum wage of $7.25 rather than looking at each employee's hourly rate or salary to determine whether the safe harbor is met. If an employee's monthly contribution for qualifying coverage is less than $89.54 (9.5 percent of $7.25 x 130 hours), the employer will satisfy the rate of pay safe harbor. A similar proxy could apply to salaried exempt employees, based on the minimum weekly salary required by the Fair Labor Standards Act.

(3) The Federal Poverty Line Safe Harbor

The Federal poverty line safe harbor will be satisfied if an employee's required contribution for qualifying coverage for a particular month is not more than 9.5 percent of the most recently published Federal poverty line for a single individual for the applicable year, divided by 12. The Federal poverty line used for applying the safe harbor depends on the employee's State of residence. There are three different Federal poverty lines: one for the 48 continental States; one for Alaska; and one for Hawaii. Because of their higher costs of living, the Federal poverty lines for Alaska and Hawaii are somewhat higher than that applied for the continental States.

For multi-State employers, the Federal poverty line safe harbor may be the easiest safe harbor to apply. For example, for an employer with operations in Illinois, Indiana, and New York, the applicable Federal poverty line for a single individual is $11,670 for 2014 (the limit for the 48 continental States). Thus, the safe harbor contribution amount for all of the employer's employees, across the three States, is $92.39/month ($11,670 x 9.5 percent /12). So long as a full-time employee's required monthly contribution for qualifying coverage doesn't exceed that amount, then the employer's coverage will be deemed affordable.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions