According to the Affordable Care Act, applicable large employers (ALEs), those companies with more than 50 employees, must offer coverage that is affordable and that provides minimum value to at least 95 percent of employees and their dependents.
In Notice 2018-88, the federal government released certain proposed safe harbors designed to help ALEs with calculating the affordability of their individual coverage health reimbursement arrangement (ICHRA) contributions. These safe harbors are intended to relieve employers of the burden of determining affordability based on information the employer wouldn’t have reasonable access to.
On September 30, 2019, the IRS and Department of the Treasury released new information that clarifies and expands the initial proposed rules.
In this post, we’ll review how affordability is determined and discuss each proposed safe harbor and how the new information helps to provide clarity.
According to the final rules regarding the ICHRA, for contributions to be considered affordable, the cost of health insurance for an employee can’t be more than 9.78 percent of the employee’s household income. The lowest-cost silver plan based on rating areas is the baseline for the calculation, with an employer’s ICHRA contributions being subtracted from the monthly premium.
That means the monthly premium for the lowest-cost silver plan, minus the ICHRA monthly contribution, shouldn’t exceed 9.78% of the employee’s household income for the month.
HHI safe harbors:
Under the proposed regulations, there are three safe harbors regarding household income (HHI). Using these, an employer can substitute an employee’s household income amount based on:
- The wages reported on the employee’s W-2
- The employees rate of pay
- The federal poverty line
The HHI safe harbors are useful for employers because they don’t have a reasonable ability to determine an employee’s true total household income.
Location safe harbor
Part of the affordability calculation depends on rating area. Using the proposed location safe harbor, an employer is able to simplify things by using an employee’s primary site of employment rather than their home address to determine the applicable rating area.
With the recent publication, the IRS and Treasury Department clarified the definition of the primary place of employment. For the purposes of the location safe harbor, the primary place of employment is the location in which the employee is reasonably expected to attend work on the first day of the plan year, or the first day they are eligible for coverage.
If the location the employee is expected to attend work changes for a permanent or indefinite period, the primary site of employment is considered to be changed on the first day of the second month after the employee begins work at the new location.
For an employee who works remotely on a regular basis but may be required to report to a particular worksite or office, the location to which they’d report is considered the primary site of employment. If an employee solely works remotely, their residence is the primary site of employment.
This safe harbor is useful because employers can look at the same rating area for all employees working at a single location.
Look-back safe harbor
The initial proposal included a safe harbor that would allow an employer the option of using the lowest-cost silver plan from a previous calendar year to help calculate the affordability for an upcoming plan year. This proposed safe harbor has been clarified.
- For a plan following the calendar year (starting on January 1), an employer can use the monthly premium of the lowest-cost silver plan from January of the prior calendar year to help determine affordability.
- A plan that begins midyear has different rules. For a plan that starts after January 1, an employer can use the monthly premium of the lowest-cost silver plan from January of the current calendar year.
The IRS and Treasury Department provided further specificity regarding the look-back safe harbor: Though the proposed safe harbor allows an employer to use an applicable look-back month to determine premium cost, they must use the employee’s age as of the first day of the plan year (or the first day they are eligible) and their current applicable location.
If an employee’s location changes during the plan year, the employer can still use the look-back month to determine the lowest-cost silver plan, but must use the employees updated location to get the correct cost.
The value of this safe harbor is that it gives employers time to determine affordability before the start of their plan year.
Employers will not be required to use any of the proposed safe harbors. They could use one or all of the safe harbors, but must use them consistently within an employee class.
All this said, the IRS and Treasury Department are still seeking comments from involved parties through the end of the year, and could thus update the safe harbors again. Subscribe to the blog to stay up to date on those regulations.