As of 2015, employers are required under the Affordable Care Act (ACA) to offer so-called “affordable” health care insurance options to all full-time employees who work an average of 30 hours per week over a defined period of time. Naturally, two questions immediately crop up for affected small businesses: “What exactly does ‘affordable’ healthcare mean?” And: “How can I ensure that I am meeting the ACA requirements to provide ‘affordable’ options to my employees?”
According to the ACA, coverage is deemed “affordable” if no full-time employee is paying more than 9.5 percent of his or her household income for self-only coverage under the employer’s lowest cost option that provides minimum value. Of course, to parse this definition, many other keywords and phrases will also need to be defined, so let’s dig a little deeper.
Keywords every business owner must understand
Household Income: For most Americans, the household is defined as the tax filer, his or her spouse, and all of their tax dependents (including those who do not need health coverage). Income is the sum of all household members who are required to file a tax return.
Minimum Value: Coverage meets “minimum value” requirements if a plan pays at least 60 percent of the actuarial value of the benefits covered under the plan. That means that a plan participant will pay no more than 40 percent of the actuarial value himself, whether that be through deductibles, coinsurance, copayments, and other out-of-pocket means.
Safe Harbors: A “safe harbor” is simply a provision in the law that offers protection or safety from liabilities or penalties in specific situations or provided that certain conditions are met. There are currently three approved safe harbors under the ACA for employee healthcare coverage.
Three safe harbor methods for measuring “affordability”
For businesses, complying with the stipulations set forth by the ACA’s safe harbor provisions means that an employer will be deemed in compliance, and thus, not subject to penalties under the law. In plain speak, it means that the coverage your business provides meets the ACA’s definition of “affordability”. However, because employers do not know what their employees’ household incomes are, businesses can take advantage of one or more of the three safe harbors outlined in the final regulations.
The 3 optional employer safe harbors for determining affordability are W-2 Income, Rate of Pay (Monthly), and Federal Poverty Line.
W-2 Safe Harbor:
This method allows the employer to use each employee’s W-2 income (Box 1) from the current year to determine affordability.
Rate of Pay (Monthly) Safe Harbor:
The rate of pay safe harbor is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee. This is if the rate of pay is decreased (but not if the rate of pay is increased).
Federal Poverty Line Safe Harbor:
The federal poverty line safe harbor treats coverage as affordable if the employee contribution for the year does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year.
For more information on ACA Safe Harbors please refer to the final regulations set forth in the Federal Register. Better yet, contact PEO Broker today for complete advice and exclusive resources on how to seamlessly navigate Obamacare, avoid penalties, save money, and grow your business.