Affordability: Employers and Employees Have Different Tests

The model notice that employers are required to provide to their employees explaining the existence of the public exchange, or marketplace, by October 1, 2013, makes mention of some of the confusing issues likely to arise around the issue of “affordable” health insurance premiums.

Employers subject to the “pay or play” mandate in 2014 can avoid a penalty when employees purchase tax subsidized coverage through the government exchange, if that employer offers its eligible employees minimum value coverage in a way that is deemed affordable to the employee. Employers will certainly follow one of the three safe harbor provisions to pass the affordability test. We expect that the most popular of the safe harbor tests will likely be the “rate of pay” test, by which an employer makes sure that the employee single monthly contribution to premium is less than 9.5% of his or her hourly rate of pay multiplied by 130 hours.

But as the model notice specifies:

     “Even if your employer intends your coverage to be affordable, you may still be eligible for a premium discount through the Marketplace…”

Individuals are eligible for a subsidy through the Marketplace if his or her household income is between 100% - 400% of the Federal Poverty Level and if any employer based coverage he or she has available would cost more than 9.5% of his or her household income. The individual household standard differs from the employer’s rate of pay standard for affordability, and can produce different results in any number of circumstances.

Most obviously, an employee can work only a portion of a year causing his or her household income to be less than what the employer’s rate of pay test would indicate. But even in circumstances where an individual works full time throughout the year, his or her household income could be less than his or her rate of pay because the household income takes into account any number of common tax deductions that a rate of pay calculation does not.

To complicate matters further, there is an entirely different standard that allows some employees to be excused from the individual mandate penalty, and that, too, may apply even when the employee’s employer offers coverage that provides minimum coverage and is deemed affordable.

An employee may be excused from paying the individual mandate penalty when his or her required contribution to employee-only coverage exceeds 8% of household income; his or her family is excused from the penalty when the contribution to family coverage exceeds 8% of household income. These exceptions to the individual mandate will apply to many employed individuals eligible for employer coverage.

The rules around individual eligibility for a subsidy and exemption from the penalty are very complex. Many employees will ask their employers for help in analyzing their own eligibility for subsidy through the Marketplace, and we encourage employers to avoid giving personal advice that may involve complex and private tax issues. It is, however, appropriate for employers to remember that there are circumstances in which they may offer coverage that is deemed affordable under the employer standard and therefore helps the employer avoid a penalty, but is not affordable to the employee under his or her test, and therefore allows him or her to buy tax subsidized coverage through the government marketplace.

Employees with personal questions should be encouraged to investigate the Marketplace, and your team at Business Benefits Insurance Solutions is prepared to help them do so.