OneDigital Benefits Compliance Consulting

ISSUED 1/26/2021

Under the employer shared responsibility provision of the Affordable Care Act (ACA), “applicable large employers” (ALEs) must offer coverage to their full-time employees and their dependents. That coverage needs to be “affordable” and meet minimum value requirements in order to avoid any shared responsibility penalties.

Applicability

This provision applies to all ALEs and ALE members who are part of a controlled group. [An ALE is an employer or controlled group of related employers with 50 or more  full-time  and full-time  equivalent employees in the prior calendar year.]

Obligation

ALEs must offer at least one affordable health plan option to all full-time employees and their dependents. [A full-time employee is one who averages 30 hours of service or more per week or 130 hours of service per month. Dependents are children from birth to the end  of the month that they reach age 26.]

Definition

A plan is considered “affordable” if the employee’s contribution toward the employee-only rate does not exceed 9.83% of one  of the safe harbor compensation methods selected. [This percentage is indexed to increase  annually.]

Safe Harbor Compensation Methods

Employers may select one method per each bona fide classification of employees. [Bona fide classification of employees is defined as a classification that is consistent with the employer’s usual business practice  and treats similarly situated individuals  in a like manner.]

• W-2 Method – measured as the final W-2 year-end wages  listed in Box 1

• Rate of pay – measured as either  (a) the hourly rate multiplied by 130 hours – the determination is made upon  date of hire or each  new plan year and must recalculate if employee changes to a lower rate of pay mid-year  – or (b) the salary divided by 12

•  Federal Poverty Level (FPL) – the amount listed for a one-person household in the most  recently  published mainland federal poverty  level table

Comparison of Safe Harbor Methods

Cash in Lieu

• Employers offering employees taxable cash in lieu of electing benefit coverage must include  this amount as employee

contributions when determining affordability.

• Example:

•   An employer offers coverage with an employee contribution of $200.

•     The employer also offers cash in lieu option that allows an employee to elect  $100 in taxable cash for not enrolling in health benefits.

•     The total employee contribution, for calculation of affordability,  is $300. The $200 for the actual election and the $100 the employee had to forgo by electing coverage.

•    Proposed rules are pending that would eliminate the addition of the $100 as employee contribution if certain

conditions are met. If adopted, this would be effective sometime in the future.

• Transition relief for employers available  prior to issuance of the final rule

•   IRS guidance issued  December 2016 indicates that employers may rely on transition relief provided in notice 2015-87 and the proposed regulations, even after January 1, 2017, if the employer’s opt-out arrangement:

•   was established and documented prior to before December 16, 2015; or

•   are provided only to employees who decline the employer-sponsored major medical coverage and the employee provide reasonable evidence that they and their “expected tax family” have or will have minimum essential coverage other than individual market  coverage (e.g., under a spouse’s employer’s plan) during  the plan year or other period covered by the opt-out arrangement (conditional opt-out arrangement)

•   NOTE:  Opt-out arrangements adopted after December 16, 2016, that are unconditional will require employers

to include opt-out cash amounts in the affordability calculation, as indicated in the example above.

Wellness Incentives

•     In certain instances, an employer may take into account the amount of wellness rewards when determining affordability.

•   Wellness  Program Unrelated to Tobacco Use: Assume  Employee Does Not Earn the Reward (Use Higher Cost)

•   Wellness  Program Related to Tobacco Use: Assume  Employee Does Earn Reward (Use Lower Cost)

• The final rule translates this to a per employee determination. In other words, the age and residence of the employee determines the lowest-cost silver plan for that employee.

• The new proposed safe harbors allow employers to base affordability on:

•  the primary worksite of the employee rather than employee residence

•  the lowest age band in the individual market for the employee's applicable location rather than the employee's specific age

•   the rates existing on January 1 of the prior calendar year (if the employer has a calendar year plan) or January 1 of the current year (if the employer has a non-calendar year plan) - see CMS employer LCSP look-up tool for January 1, 2019

• The new proposed optional safe harbors allow employers to comply with ACA rules by:

• using the safe 4980H affordability safe harbors as defined for ESRPs, namely the employee's W-2, rate of pay, or federal poverty line, rather than using HHI

• expanding the minimum value definition to state that all ICHRAs meet minimum value if they are affordable under the safe harbors

•  extending the same ESRP rules about tobacco and wellness premium adjustments when considering ICHRA premium, i.e., employers should use non-tobacco rates and forgo  inclusion of wellness incentives when determining affordability

•    confirming that there are no changes to health plan reporting  under §6055, i.e., plans using Forms

1094-B and 1095-B, which are non-ALE health plans

•   committing to provide additional future guidance to ALE's responsible for reporting under §6056, i.e., Forms

1094-C and 1095-C

• Employers should review affordability guidelines, annually, prior to renewal and determine maximum contributions under each method
• Documentation of safe harbor methods is included in employer reporting requirements for applicable large employers 
  • information required on Form 1095-C for IRS reporting and employee statements 
  • employers must enter specific codes referring to safe harbors on line 16 of Form 1095 C for any employee for whom an offer of coverage is made but that offer is declined. 
• Employers should clearly document safe harbor methods used per class, per employee, each year.
• When adding new classes of employees, employers should review and document the eligibility for the offer of coverage.
• For companies who did not have a cash in lieu option offered prior to December 16, 2015 but who are interested in doing so now, recommend they implement the conditional opt-out arrangement to avoid having to include these monies in the affordability calculation.