The Treasury Department and the Internal Revenue Service (IRS) are soliciting input on a proposed affordability “safe harbor” for employers under the shared responsibility provisions of the Affordable Care Act that would make it easier for employers to determine whether their health care plan is affordable. Under these shared responsibility provisions – commonly referred to as the “pay or play” mandate – employers with 50 or more employees must provide affordable minimal essential health coverage to their full-time employees or pay a penalty. Generally, under the law, an employer-sponsored health care plan is considered affordable for an employee if that employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. The proposed safe harbor provision would enable an employer to make this affordability calculation based on each employee’s W-2 wages instead of on each employee’s household income.

As discussed in the IRS Notice 2011-73, (pdf) because employers do not have knowledge of many factors involved in determining an employee’s household income, they “may encounter practical difficulties” in determining whether the coverage offered would be deemed affordable under the law. To address this concern and assist employers in assessing their plan’s affordability, the agencies are proposing an affordability safe harbor:

whereby, for purposes of § 4980H(b), affordability of an employer’s coverage would be measured by reference to an employee’s wages from that employer. Wages for this purpose would be the total amount of wages as defined in § 3401(a), which is the amount required to be reported in Box 1 of Form W-2, Wage and Tax Statement (W-2 wages).

The safe harbor would require a showing “(1) that the employer must offer its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan, and (2) that the employee portion of the self-only premium for the employer’s lowest cost coverage that provides minimum value (the employee contribution) must not exceed 9.5 percent of the employee’s W-2 wages.”

If the employer is able to meet these requirements, it would not be subject to a penalty even if the employee at issue receives a premium tax credit or health plan cost sharing reduction. Consideration of the safe harbor would be made after the end of the calendar year “and on an employee-by-employee basis, taking into account the W-2 wages and the employee contribution.” An employer would also be permitted to use the safe harbor prospectively “by structuring its plan and operations to set the employee contribution at a level so that the employee contribution for each employee would not exceed 9.5 percent of that employee’s W-2 wages for that year.”

To this end, the agencies are seeking comment on the following issues related to the proposed safe harbor:

• Whether or how wages and employee contribution amounts would need to be determined for employees who are employed by an employer for less than a full year, employees who move between full-time and part-time status, situations in which the plan year is not a calendar year, and other similar special circumstances.
• Whether there are other possible safe harbor methods for determining the affordability of coverage under an employer-sponsored plan for purposes of calculating an employer’s potential assessable payment under § 4980H(b).
• How to coordinate any affordability safe harbor with the full-time employee look-back/stability safe harbor described in Notice 2011-36.

Comments must be received by December 13, 2011 and reference “Notice 2011-73.” Comments may be submitted via email to: Notice.comments@irscounsel.treas.gov (include “Notice 2011-73” in the subject line of the message); sent by mail to: C:PA:LPD:PR (Notice 2011-73), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044; or submitted via hand-delivery to CC:PA:LPD:PR (Notice 2011-73), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044.

Photo credit: Bartek Szewczyk