The Internal Revenue Service is looking for input on a proposal to give large employers a “safe harbor” to avoid paying a tax penalty for not offering “affordable” health care coverage. The planned safe harbor that would deem health care coverage affordable if the premium contribution for single coverage does not exceed 9.5 percent of an employee’s W-2 wages. The request for comments is intended to continue the process of developing regulatory guidance on the shared employer responsibility provisions of the Internal Revenue Code.
According to the Patient Protection and Affordable Care Act, after December 31, 2013, large empoyers are subject to a penalty if any full-time employee is certified to receive an applicable premium tax credit or cost-sharing reduction and the employer does not offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan.
Whether an large employer’s health coverage is affordable to its full-time employees is essential in determining whether an employee can receive a premium tax credit and, in turn, whether the employer is subject to a penalty. But there are questions about who specifically is a full-time employee. The IRS is considering offering a “safe harbor” method for determining full-time status and would like the public’s input.
Currently, coverage under an employer-sponsored plan is affordable to a particular employee if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. Because affordability is determined by reference to household income and because household income is determined by reference to variables that are generally unknown to an employer, employers may encounter practical difficulties in assessing whether the coverage they are offering is affordable to certain employees.
To address this concern and provide employers a more workable option for determining the affordability of their health coverage, Treasury and the IRS expect to propose an affordability safe harbor. Under the proposal, affordability of an employer’s coverage would be measured by reference to an employee’s wages from that employer. Under this proposed safe harbor, an employer would need to meet certain requirements, including: (1) that the employer must offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, and (2) that the employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value (the employee contribution) must not exceed 9.5 percent of the employee’s W-2 wages. If the employer satisfies both of these requirements for a particular employee (as well as any other conditions for the safe harbor), the employer would not be subject to a penalty with respect to that particular employee, even if that employee receives a premium tax credit or cost sharing reduction. Read the full report.