The ACA Affordable Coverage Test – Will You Pass?

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The Employer’s Shared Responsibility provisions calls for four conditions to be met to avoid paying penalties: In 2015, at least 70 percent of full-time employers must be offered coverage that is minimum essential coverage, minimum value, and affordable. We’re shining this spotlight on affordable coverage, what is it and how is it measured.

What is Affordable Coverage?

Employer provided health coverage must meet the affordability test. This means that the employee’s required contribution for employee-only coverage under the least expensive plan offered cannot be more than 9.56% of the employee’s household income.

Take note of the five components of this requirement calculation:

  1. employee contribution
  2. for employee-only coverage
  3. for the least expensive plan offered
  4. cannot be more than the annually stated percentage, (9.5% for 2014; 9.56% for 2015)
  5. of the employee’s household income.

In addition to the Employer Shared Responsibility provision, the affordability test also determines an employee’s eligibility for a premium tax credit for insurance purchased through the Health Insurance Marketplace.

The employer knows the value for the first four conditions. But how could employers know the employee’s household income? To allow for that, the ACA offers three Safe Harbor tests.

Employers may use any one of the following for the household income part of the test:

  • Rate of pay safe harbor: Calculate individually using the employee’s hourly rate or calculate for the entire employee population using the lowest hourly rate paid multiplied by 130 hours.
  • Form W-2 safe harbor: Use the value in Box 1 of the W-2.
  • Federal poverty line safe harbor: Use the federal poverty line in effect on the first day of the plan year.

These safe harbors apply only to employers, and do not impact an individual’s eligibility for premium tax credits.

Notification of Coverage Options through the Exchange

The affordability test is part of the information in the Notification of Coverage Options through the Exchange. Section 1512 of the Affordable Care Act, requires employers to provide employees with information about options available through the Heath Insurance Marketplace or Exchange.

The notice must be written and should be distributed to all new hires. The notice should include:

  • A description of the Heath Insurance Marketplace
  • Information about how they may qualify for private insurance through the exchanges, depending, in part, on the affordability test
  • Notice that if the employee chooses to buy private insurance, they forfeit the employer contribution to their health insurance.

You’ll find model language for your company’s notice at the Department of Labor website.

This might be a good time to refresh your understanding of the new employer reporting requirements in effect this year. Take another look at our article “The no-tears solution to new ACA reporting requirements.”

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