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

24 April 2014 Publication
Authors: Casey K. Fleming Belinda S. Morgan Leigh C. Riley

Legal News Alert: Employee Benefits & Executive Compensation

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.

Internal Revenue Service regulations generally require that, for purposes of avoiding United States federal tax penalties, a taxpayer may only rely on formal written opinions meeting specific requirements described in those regulations. This newsletter does not meet those requirements. To the extent this newsletter contains written information relating to United States federal tax issues, the written information is not intended or written to be used, and a taxpayer cannot use it, for the purpose of avoiding United States federal tax penalties, and it was not written to support the promotion or marketing of any transaction or matter discussed in the newsletter.

Legal News is part of our ongoing commitment to providing up-to-the-minute information about pressing concerns or industry issues affecting our clients and colleagues. If you have any questions about this update or would like to discuss the topic further, please contact your Foley attorney or the following:

Katherine L. Aizawa
San Francisco, California

Casey K. Fleming
Milwaukee, Wisconsin

Belinda S. Morgan
Chicago, Illinois

Leigh C. Riley
Milwaukee, Wisconsin

Erik D. Vogt
Chicago, Illinois

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