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IRS Releases Safe Harbor Proposal for Employers - September 14, 2011

Yesterday the IRS released Notice 2011-73 outlining its proposed safe harbor for employers subject to the shared responsibility provisions of the Affordable Care Act and who will be penalized for not providing affordable, minimum essential coverage in 2014. Because the determination of whether employer coverage is affordable is based on household income, a figure not known by employers, an employer may encounter practical difficulties in assessing whether the coverage they offer to employees is affordable. To address this concern, the IRS  proposes creating a safe harbor providing that an employer who offers full-time employees the opportunity to enroll in minimum essential coverage will not be penalized if the required employee premium contribution for single coverage in the employer's lowest cost plan does not exceed 9.5% of the employee's W-2 wages, regardless of whether the employee receives a subsidy from the federal government based on the employee's household income. W-2 wages is defined by the safe harbor as the amount reported in Box 1 of Form W-2 which does not include amounts excluded from taxable income, such as medical premiums or 401(k) contributions. The IRS will determine whether an employer actually meets the safe harbor at the end of each calendar year; however, the IRS expects that employers will use the safe harbor prospectively to set employee contribution levels.


The proposed safe harbor is unlikely to have a significant impact on whether an employer is actually penalized since in a majority of cases an employee's household income will be greater than his/her reported W-2 wages. The safe harbor will, however, protect an employer in circumstances where an employee's household income is less than W-2 wages. This can be the case if the employee has alimony deductions or deductions based on losses due to self-employment. In addition, the impact of the proposed safe harbor on predicting prospectively whether employer coverage is affordable is diminished by the IRS' definition of wages, which excludes pre-tax contributions to various employee benefit programs. Because these contributions are typically determined after an employer has established its contribution rates and because employee contributions may change mid-year (for example 401(k) deferrals), it will still be difficult for an employer to predict with certainty at the beginning of a plan year whether its coverage is affordable. 


The IRS intends to propose regulations incorporating the safe harbor but is seeking comments on its proposal until December 13, 2011.