CWA HEALTH CARE REFORM UPDATE: How will employers determine penalties?

How will employers collect household income data for the purpose of determining penalties?

On July 2, 2013, the Obama Administration announced that it would delay implementing the employer mandate due the complex administration necessary to collect data from employers. New, simplified rules for employers will be released in the coming months followed by a year of testing and fine tuning before employers will be expected to comply. This means that current rules will be subject to change. The following is an explanation of the rules as they stand now.

Beginning in 2014, workers at large employers will be eligible to get subsidized coverage on the new state-based health insurance exchanges if the coverage offered by their employer doesn’t meet the standard for “affordable” set out in the law. Starting in 2015, for each employee that forgoes unaffordable job-based coverage and receives a Federal subsidy for exchange coverage, the employer will be fined $3,000.

The difficulty for employers is that the law defines coverage as “affordable” if employee-only premiums are less than or equal to 9.5% of household income. Its unlikely that employers will know the total income being generated in a household (either from a spouse or a second job, for example). For this reason the IRS released three “safe harbor” provisions that, if met, will guarantee the employer protection from penalties without knowing the household income of their employees.

1. Form W-2 Safe Harbor - Under this provision, the employer’s plan will be considered affordable if employee-only premiums are 9.5% or less of the employee’s wages from that employer (Box 1 of employee’s Form W-2).
2. Rate of Pay Safe Harbor - Under this provision, at the beginning of the year the employer may take the hourly rate of each eligible employee, multiply it by 130 hours per month, and use this figure to determine affordability. This method is valid for the entire year as long as the employee’s hourly wage doesn’t decrease during that time. This provision will be useful for employers that pay workers on an hourly basis.
3. Federal Poverty Line Safe Harbor - For the purposes of this provision, the employer will be safe from penalty payments if the cost of employee-only coverage does not exceed 9.5% of the federal poverty line for a single person (household of 1).

These “safe harbor” provisions do not affect the ability of employees to qualify for subsidies on the exchanges. They only guarantee that employers that meet these requirements will fulfill the affordability standard under the ACA.