Determining ‘Affordability’ of Coverage under PPACA

By Kristi R. Gauthier, Esq.
Clark Hill PLC

Nov. 26, 2013 – The concept of “affordable” coverage comes up frequently when trying to navigate the complex rules under the Patient Protection and Affordable Care Act (“PPACA”). While it is a defined term, it has different meanings depending on whether you are trying to understand compliance with the employer shared responsibility provisions, determine whether an individual will be eligible for subsidized marketplace/exchange coverage, or understand the exemptions from the individual mandate penalties.

Employer Shared Responsibility Provisions
For an Applicable Large Employer to avoid employer shared responsibility penalties beginning in 2015, the employer must provide “affordable”, minimum value coverage to at least 95% of its full-time workforce and their dependent children to age 26. In this context, the term “affordable” means that the cost of self-only coverage (regardless of the coverage level in which the individual is actually enrolled) does not exceed 9.5% of the individual’s household income (the modified adjusted gross income of the employee and any members of the employee’s family, including spouse and dependents, who are required to file an income tax return). Instead of using an employee’s household income, the IRS permits employers to use one of the following safe-harbors:

• W-2 Wages: Coverage will be deemed affordable so long as the cost to employees for self-only coverage does not exceed 9.5% of the employee’s W-2 wages with that employer. (Note: Many employers do not prefer this method as it does not take into consideration any pre-tax contributions to benefit plans and, therefore, could actually produce a lower base to determine affordability.)

• Rate-of-Pay: Coverage will be deemed affordable so long as the cost to employees for self-only coverage does not exceed 9.5% of the employee’s monthly “rate-of-pay” which is calculated by taking the employee’s hourly rate multiplied by 130.

•  Federal Poverty Line: Coverage will be deemed affordable so long as the cost to employees for self-only coverage does not exceed 9.5% of the annual federal poverty line for a single individual ($11,490 for 2013).

If an employer offers multiple levels of coverage, affordability can be based upon the lowest level of coverage that provides minimum value in accordance with applicable regulations.

It is also important to note that while in order to avoid employer shared responsibility penalties in 2015 and beyond the employer must also offer coverage to the dependent children (until age 26) of its full-time employees, the cost of the coverage for those dependents does not have to be “affordable”. In other words, an employer just has to offer the coverage to dependents and can charge any amount for dependent coverage, even 100% employee paid, and not trigger penalties.

Eligibility for Exchange Subsidies
Beginning in 2014, U.S. citizens and legal residents in families with household incomes between 100% and 400% of the federal poverty level for the individual’s family size, and who are not offered affordable, minimum value coverage through an employer, are eligible to receive a premium subsidy to reduce the cost of purchasing health coverage on the exchange. For these purposes, “affordability” is based on the cost for self-only coverage (regardless of the level of coverage in which the employee is actually enrolled) not exceeding 9.5% of the individual’s household income. The method used by the applicable employer to determine affordability for employer shared responsibility purposes does not determine affordability for purposes of exchange subsidies.

Individual Mandate Penalties
Beginning in 2014, PPACA requires U.S. citizens and legal residents to maintain minimum essential coverage for themselves and any nonexempt family members. Failure to maintain such coverage could subject individuals to penalties unless the individuals are exempt from this requirement. One category of exempt individuals are those that do not have an affordable health coverage option available to them. For these purposes, “affordability” means that the cost of coverage does not exceed 8% of the individual’s household income based on either (1) the self-only premium under an eligible employer-sponsored plan, or (2) the self-only premium for the single lowest cost Bronze level plan available on the exchange serving the area in which the individual resides.

*This article is not intended to give legal advice. It is comprised of general information. Employers facing specific issues should seek the assistance of legal counsel.

Kristi R. Gauthier is a senior attorney in Clark Hill’s Birmingham office and concentrates her practice in Employee Benefits Law. Kristi has represented clients in a wide variety of employee benefits issues involving health and welfare benefits, as well as retirement plans. Kristi is admitted to practice in the State of Michigan, the U.S. District Court for the Eastern District of Michigan, and the U.S. Sixth Circuit Court of Appeals. She also is active in the legal community with memberships in the American Bar Association, the State Bar of Michigan, and the Oakland County Bar Association where she is a member of the Employee Benefits Committee. Kristi also serves as a member of the Clark Hill Diversity and Inclusion Committee. Kristi has lectured on various employee benefits issues, including ERISA compliance, healthcare reform, COBRA, section 125 plans, 403(b) plans and IRS plan correction programs. Kristi is also a co-author of the ABA publication ERISA Survey of Federal Circuits. Kristi was named a “Rising Star” by Michigan Super Lawyers in 2011.