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It’s the Affordable Care Act. But What Is Affordable? By ROBB MANDELBAUM

Under the Affordable Care Act, if a company with 50 employees hopes to avoid the penalty in the so-called employer mandate, it is not enough to merely offer those workers health insurance. The insurance must be “affordable,” among other things, and the law is very specific about what affordable means: It means the employee’s share of the premium cannot exceed 9.5 percent of the employee’s household income.

If this seems straightforward, putting it into action has been anything but. Household income is the benchmark because the Affordable Care Act ties affordability to the tax credits and subsidies available to help individuals purchase insurance in the new marketplaces created by the law. In fact, the penalty for employers who offer unaffordable insurance comes into play only when employees use these subsidies to buy their own insurance rather than accept the company’s coverage.

But employers, of course, are in no position to know what their employees’ household income might be, least of all as determined by the esoteric definition of household income used by the Internal Revenue Service. Among other things, determining household income would force employers to find out how much their employees’ spouses make and even to track down certain private household expenses, like alimony payments.

 

So the I.R.S., which is writing the regulations for the mandate, has proposed three alternatives to determining household income, safe harbors that would permit employers to comply with the mandate and avoid the penalty. First, a company could use the wages it reports to the I.R.S. on Form W-2 as a substitute for household income. So long as the employee’s share of the insurance premiums is no more than 9.5 percent of the wages reported in Box 1 of the form (meaning the amount excludes deferrals such as 401k or flexible spending account contributions), the coverage would be deemed affordable. (Again, this is for companies with more than 50 employees; smaller companies are under no obligation to provide health insurance.)

Or the company could calculate a baseline monthly wage based on the first month’s hourly rate or salary. Unlike the W-2 option, the wage calculated here would not exclude deferrals, so it would likely be higher. However, if the company reduced the employee’s hourly rate or salary over the year, it would not be able to use this option. And that eliminates this option for many companies, because they generally cannot plan for wage cuts, said Seth Perretta, an attorney from the Washington firm Crowell & Moring, who is representing several trade groups in the rule making.

Finally, the company could simply substitute the federal poverty level guidelines for an individual for the employee’s actual household income. In 2013, the federal poverty level for an individual in the mainland United States is $11,490. “The practical effect there is that if you have coverage that is affordable at that level, it’s definitely going to be affordable by the time the I.R.S. comes looking” at an employee’s household income, Mr. Perretta said.

With each of the safe harbors the I.R.S. has proposed, employers trade convenience or certainty for, potentially, a lower threshold for affordability. For example, imagine a household where the husband and wife  earn $50,000 apiece: If the husband’s employer uses the W-2 safe harbor, the company’s affordability threshold falls from 9.5 percent of household income to 4.75 percent, which means the employer will have to pick up a larger portion of the employee’s insurance premium. “All those safe harbors are a disadvantage to the employers,” Mr. Perretta said. “They’re conservative estimates of affordable.”

The rule could also create confusion for employees who try to buy insurance on an exchange, because none of these safe harbors will actually be used by the exchanges to determine whether the insurance offered by the company really is unaffordable and, therefore, whether the worker is entitled to a government-paid subsidy. Instead, the exchanges will rely on household income, which the employee will estimate, backed by the most recent tax return available.

The upshot is that, as the I.R.S. acknowledged in its proposed rule, there could be cases where an employer’s offer of coverage would be treated as affordable for the purposes of the employer mandate but unaffordable when the worker seeks coverage on the exchange. In that event, the employer would get a pass. Though the employee would get the tax credits to buy individual insurance, the company would not have to pay the penalty that covers at least part of the cost of the subsidy. In addition, the safe harbors are voluntary. If a company is unhappy with the alternatives they offer, it can always attempt to calculate each employee’s actual household income.

In any case, the business lobby — perhaps relieved that companies will not have to figure out how much money their employees’ spouses are making — seems satisfied with what the I.R.S. has done. “The W-2 pay rule is a good objective standard that people can use,” said J.D. Piro, a senior vice president in charge of the health law group at the benefits consulting company Aon Hewitt. “The employers’ interest is in passing the test with the data that they have.”

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