By: HUB’s EB Compliance Team

To understand the Affordable Care Act (“ACA”) employer mandate, employers need to understand if they are subject to the mandate and which employees must be offered coverage, but they also need to know what type of coverage to offer. To avoid a penalty under the mandate, employers must offer minimum essential coverage that provides minimum value and is affordable. Each of those terms has a special meaning in this context.

Minimum Essential Coverage

Minimum Essential Coverage (“MEC”) is major medical plan coverage (i.e., doctor’s office visits, hospitalization, and prescriptions) offered by an employer. Limited benefit plans (like fixed indemnity insurance or cancer-only policies) are not considered MEC plans. Most major medical plans from an insurer and offered by an employer will constitute MEC.

Minimum Value Coverage

In broad terms, “Minimum Value” means the health insurance has an actuarial value of 60%. This means a health plan will typically cover at least 60 cents out of every dollar of medical expenses on average. Obviously, individual participant experiences will vary.

Generally, the health insurance carrier makes this determination for fully-insured plans. Virtually all major medical plans offered by insurers meet minimum value. The federal government provides a minimum value calculator that self-insured plans can use to make the determination. They can also get an actuarial certification. The plan’s Summary of Benefits Coverage (SBC) must disclose if the plan does, or does not, provide minimum value.

Affordability Calculations

Congress enacted ACA with a 9.5% affordability threshold, but that number changes annually to reflect cost of living adjustments. Specifically, ACA “affordability” is determined based on the applicable affordability percentage of the employee’s household income, as determined each year by the Internal Revenue Service (“IRS”). In addition, affordability is based on the monthly cost of employee-only coverage for the employer’s lowest cost plan, even when employees choose family coverage. Likewise, if the employer offers both affordable and unaffordable options, the employee may enroll in any eligible plan option (even the unaffordable option) without triggering an employer penalty.

Overall affordability is based on the employee’s household income; however, since employers do not know the employee’s household income, they have three potential safe harbors from which to choose.

Federal Poverty Level (“FPL”) Safe Harbor

  • Calculation is based on the Federal Poverty Level for a single individual multiplied by the applicable affordability percentage and divided by 12 months. While FPL levels vary for Hawaii and Alaska, if the employee contribution for the lowest-cost employee-only coverage does not exceed FPL levels in the 48 contiguous states and the District of Columbia multiplied by the applicable affordability percentage, the employer will have met the affordability requirement in all states.
  • Does not require employers to look at the employee’s rate of pay or earnings.
  • Plans with plan years beginning in the first six months of the calendar year, including calendar year plans, must base calculations on the prior calendar year’s FPL and the plan year’s affordability percentage.

Example: AAA Corp has a calendar year plan renewing on January 1, 2024. $14,580 (2023 Federal Poverty Level) * 8.39% (2024 affordability percentage) / 12 months = $101.94 maximum monthly employee contribution under the FPL Safe Harbor

Rate of Pay Safe Harbor

  • The calculation is based on an hourly-paid employee’s hourly rate of pay (more common) multiplied by 130 hours or a non-hourly-paid employee’s annual salary (less common) divided by 12 months and multiplied by the applicable affordability percentage.
  • Requires employers to look at the employee’s rate of pay or salary but does not depend on actual hours worked or earnings. However, if the non-hourly-paid employee’s salary is reduced (including due to a reduction in hours) during the year, this safe harbor is unavailable.

Example (Hourly): Delta earns $12 per hour. $12 per hour * 130 hours = $1,560 * 8.39% (2024 affordability percentage) = $130.88 maximum monthly affordable contribution under the Rate of Pay Safe Harbor

Example (Salary): Gamma earns $36,000 per year. $36,000 per year / 12 months = $3,000 * 8.39% (2024 affordability percentage) = $251.70 maximum monthly affordable contribution under the Rate of Pay Safe Harbor

W-2 Safe Harbor

  • The calculation is based on Box 1 of the employee’s W-2 divided by 12 months and multiplied by the applicable affordability percentage.
  • Box 1 is the employee’s taxable income, which equals gross earnings minus pre-tax deductions.
  • Box 1 is heavily dependent on the employee’s rate of pay, hours worked, and pre-tax deductions. Due to the nature of pre-tax deductions, employees with similar rates of pay and hours worked can have quite different Box 1 amounts depending on their benefits elections.

Example: Foxtrot’s 2023 Box 1 amount is $37,433. $37,433*8.39% = $3,140.63 annual affordable contribution; $3,140.63/12 = $261.72 maximum monthly affordable contribution under the W-2 Safe Harbor

Affordability and Wellness Programs

Employers must consider ACA affordability when designing premium differentials applicable to wellness programs. Since wellness programs must be voluntary, employers cannot use lower rates that assume participation in wellness programs for affordability purposes. The exception is a wellness incentive tied to tobacco use, which allows the lower, non-tobacco rate to be used for affordability.

Example: Golf Corp charges $125 per month for employee-only coverage for those who complete the health risk assessment and $155 per month for those who do not complete the health risk assessment. Golf Corp must base whether its plan is affordable on $155 per month.

Example: Hotel Corp charges $115 per month for employee-only coverage for those who do not use tobacco and $155 per month for those who use tobacco. Hotel Corp must base whether its plan is affordable on $115 per month.

Reporting Requirements

How does the IRS enforce these complicated requirements? The agency has developed a complex reporting system that directs employers to track and report Employer Mandate compliance using a (still evolving) coded reporting form capturing coverage by participants and social security numbers monthly. Specifically, ALEs (Applicable Large Employer) must report information about the health coverage they offer to the IRS and to their employees using Forms 1094 and 1095. ALEs that deem paying an annual penalty cheaper and less burdensome than operating a health plan still must comply with ACA reporting or they become subject to a separate “failure to file” penalty. (Details about reporting requirements exceed the scope of this article but may be reviewed here).

Conclusion

Given the ACA employer mandate’s daunting compliance duties, the substantial penalty risks, and ongoing IRS enforcement activities, employers should maintain accurate records related to health coverage, plan materials, headcount, and service hours. Employers should particularly focus on retaining organized records of health coverage offer details, employee contributions, and all employee coverage waivers. These records will enable an ALE to push back if challenged by the IRS regarding the ALE’s Employer Mandate compliance.

For more information, check out HUB’s ACA Employer Mandate FAQs.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.