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Good News for Employers - August 22, 2011

Federal regulators are softening the impact of the employer penalty provisions in the Affordable Care Act.  In its comments in the preamble to the proposed premium assistance rules, the IRS announced upcoming rules that should alleviate the burden of the employer penalty provisions on many employers. Under the Act, beginning in 2014 employers with 50 or more employees who do not offer any health coverage or who do not offer "affordable" coverage with a "minimum value"  must pay a penalty to the federal government if one of their full-time employees receives a premium assistance subsidy from the federal government. Coverage is not "affordable" if an employee must spend more than 9.5% of his/her household income on the coverage.  


The Act did not provide whether that coverage was limited to single coverage or included family coverage.  Many employers were concerned their coverage would not be affordable because while they paid substantially all of the single premium, they often paid a much lower percentage of the family coverage. The IRS has announced that it will interpret "coverage" for purposes of the affordability provisions as only single coverage. Therefore, if an employee's required contribution for single coverage does not exceed 9.5% of his/her income, even if the required contribution for family coverage exceeds 9.5%, the employee will not qualify for a subsidy and the employer will not be penalized. This should significantly decrease the number of employees eligible for the subsidy.


The IRS also announced that later this year it expects to issue proposed rules creating an employer safe harbor to the employer responsibility provisions.  Because the Act determines affordability of coverage based on an employee's household income, it is impossible for an employer to determine whether an employee qualifies for a subsidy and whether the employer will be penalized as the employer does not know an employee's actual household income, only what the employer pays the employee in wages.  As a result, even if an employer intends to offer affordable coverage to all full-time employees, one or more full-time employees may receive a subsidy and the employer penalized. To alleviate this problem, the IRS announced it intends to create a safe harbor which exempts an employer from paying a penalty with respect to any employee who receives a subsidy if the employee portion of the single coverage offered by the employer to the employee does not exceed 9.5% of the employee's current W-2 wages from the employer. Therefore, an employer will only need to look at the employee's W-2 income in determining whether it will be penalized based on the coverage offered to that employee. This should make any penalty an employer pays more predictable and employers should be able to structure coverage to avoid the penalty if they so choose.


In addition to being "affordable", an employer's coverage must also have a "minimum value" (60% of total allowed costs) in order for the employer to avoid a penalty. The IRS announced that it intends to issue rules later this  year that clarify employer coverage may meet this minimum value requirement even if it does not provide coverage of all the essential health benefits listed in the Act and defined by HHS.  For example, pediatric dental is currently listed in the Act as an "essential health benefit." It appears that under the IRS' anticipated rules, employer coverage could still meet the minimum value test even if it does not provide any coverage for pediatric dental benefits.


These comments are welcome news for employers with 50 or more employees as if adopted the rules will decrease the number of employees qualifying for the subsidy and allow the employer to determine in advance whether it will be penalized. According to the IRS' comments, the proposed rules implementing these policies should be released later this year. Employers and interested parties should consider commenting on the rules at that time.