Because expanding a health plan to add dependent coverage may be difficult, the proposed regulations provide some relief. By taking steps toward offering coverage (not paying for coverage) for full-time employees’ dependents during the plan year that begins in 2014, a large employer will not be assessed a penalty during that plan year solely because it failed to offer coverage to the dependents of its full-time employees.
How Can a Large Employer Avoid the Penalty?
Remember that if one or more full-time employee receives a premium tax credit to help pay for health coverage on an Insurance Exchange, the employer may still be assessed a penalty, even if it offers coverage to at least 95 percent of its full-time employees. To prevent this from happening, the minimum essential health coverage offered by the employer must provide “minimum value” and be “affordable.”
Health coverage will generally satisfy the “minimum value” requirement if it covers at least 60 percent of healthcare costs. To be considered “affordable,” the employee’s required contribution for employee-only coverage cannot be more than 9.5 percent of the employee’s household income for the taxable year.
But how does an employer know the household income for each of its employees? Troubled by the same question, the proposed regulations provide three optional “affordability” safe harbors. Employers may use one or more of the following safe harbors for all employees or for any reasonable category of employees, provided they are used uniformly and consistently for all employees in a category.
Form W-2 safe harbor. Under this safe harbor, an employer will not be assessed a penalty for an employee if the required annual contribution for the employer’s cheapest employee-only coverage plan is not more than 9.5 percent of that employee’s Form W-2 wages received from that employer. If an employee isn’t offered coverage for an entire calendar year, the Form W-2 wages can be adjusted to reflect the period for which coverage was offered.
This safe harbor is applied on an employee-by-employee basis after the calendar year. To avoid manipulation, the employee’s required contribution must remain consistent during the calendar year, and the employer cannot make discretionary adjustments to the required employee contribution for a pay period.
Rate of pay safe harbor. Under this safe harbor, an employer computes the employee’s monthly wages by multiplying the rate of pay for each hourly employee who’s eligible for coverage under the plan as of the beginning of the plan year by 130 hours (the benchmark for monthly full-time status). For salaried employees, the monthly salary is used.
If the employee’s monthly contribution amount for the cheapest employee-only coverage plan is not more than 9.5 percent of the computed monthly wages, then the coverage is considered affordable. This safe harbor lets employers prospectively determine affordability without having to analyze every employee’s wages and hours. However, it may only be used for those employees who did not have their hourly wages or monthly salaries reduced by the employer during the year.
Federal poverty line safe harbor. Under this safe harbor, coverage is considered affordable if the employee’s cost for the cheapest employee-only coverage plan is not more than 9.5 percent of the Federal Poverty Line for a single individual. The proposed regulations allow an employer to use the most recently published poverty guidelines for the first day of the plan year.
The uncertainty surrounding many of the Affordable Care Act’s requirements, including the employer shared responsibility penalty provision, is making it difficult for self-storage employers to prepare for the coming changes. Remember that the IRS’s proposed regulations are subject to change. Nevertheless, employers who are (or may be) facing a penalty need to monitor developments and plan accordingly. Failing to do so may prove costly.
Anita Byer is president and CEO, and Martin Salcedo is general counsel/self-storage risk management group member, of Setnor Byer Insurance & Risk, headquartered in Plantation, Fla. For more information, call 888.253.8498; visit www.setnorbyer.com .