Affordability Test

Affordability Test

On December 16, 2015 the IRS released IRS Notice 2015-87 providing guidance on the employer-provided health coverage affordability test.  The ACA provides that an individual may be eligible for a premium tax credit for coverage on the exchange if the cost of the plan exceeds 9.5% (adjusted annually) of the household income.  The 2015 household income threshold percentage for Marketplace coverage is 9.56%.  In 2016 the household income threshold is 9.66%.   IRS Notice 2015-87 allows employers to use the adjusted amounts in determining affordability using the safe harbor tests (W-2 wages, Rate of pay, or Federal Poverty Level).  The IRS intends to amend the related regulations; in the meantime, employers may rely on the indexed percentages (9.56% for 2015 and 9.66% for 2016).

The notice goes on to express that employer flex credits made under Section 125 cafeteria plans that are not specifically made as a health plan contribution cannot be considered in determining affordability.  Furthermore, the IRS noted their intention to issue regulations in the near future that would require employers to take opt-out payments (Cash-In-Lieu) into account when calculating whether health plan coverage is affordable.  For example, if the monthly cost to participate in single coverage under an employer’s health plan is $200, but the employee could receive a $100 per month opt-out payment if the employee declines medical coverage, the IRS is taking the position that the employee’s cost for the coverage is actually $300 per month.  Also read Flex Credits and Cash-in-Lieu of Health Plan – Impacts Affordability.