What's 'Affordable' Coverage Under Health Care Reform?

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Under the Patient Protection and Affordable Care Act (referred to as PPACA or ACA, or just the Affordable Care Act), employer-provided coverage is considered "affordable" if it meets one of the three IRS safe harbors for determining that the employee's contribution for self-only coverage doesn't exceed 9.5 percent of the employee's household income.

As the box above noted, since there is no practical way to known what an employee's "household income" might be, employers can use one of these three safe-harbor methods:

• Employee's required premium co-share for the lowest-cost, self-only coverage that provides minimum value is not greater than 9.5 percent of an employee's W-2 taxable (Box 1) income. Unfortunately—and, many argue, unfairly—this calculation excludes any employer contribution made to an employee's health savings account (HSA), as well as employer contributions to 401(k) plans or other nontaxable Section 125 (cafeteria plan) benefits. Also, the cost of dependent coverage is not calculated in the determination of whether the employer is offering affordable coverage.

• Employee’s required premium co-share for the lowest-cost, self-only coverage that provides minimum value is not greater than 9.5 percent of rate of pay as of the first day of the coverage period (generally the first day of the plan year).

• Employee’s required premium co-share for the lowest-cost, self-only coverage that provides minimum value is not greater than 9.5 percent of the federal poverty level (FPL) for a single individual.

Coverage is considered to provide "minimum value" if:

• The plan covers at least, on average, 60 percent of an employee's medical expenses (as determined by minimum-value calculations). This is also referred to as "actuarial value."

Interestingly, according to a Department of Health and Human Services proposal, an employer's annual contributions to HSAs or health reimbursement arrangements (HRAs) would be considered part of the benefit design of the health plan for purposes of calculating the plan's minimum 60 percent actuarial value. However, employees' contributions to their HSAs would not be reflected in the actuarial value estimate (HRAs don't allow employee contributions).

HHS's proposed regulations also provide that minimum value is determined without regard to reduced cost-sharing available under a wellness program. However, for programs relating to tobacco use, minimum value may be calculated assuming that every eligible individual satisfies the terms of the program relating to prevention or reduction of tobacco use.

The ACA's employer mandate to provide health care is known formally as the "shared responsibility" provisions, and informally as "play or pay."

If an employer does not provide a plan that is "affordable" with at least "minimum value" coverage, the employee can shop for insurance through a public exchange and may qualify for federal tax credits. Employers that are midsize (the equivalent of 50 to 99 full-time workers based on a 30-hour work week) and large (100+) will face penalties starting at $2,000 per employee, after adjustments, if they fail to provide "affordable" coverage and have employees that receive federal tax credits to purchase exchange-based coverage (more on this below and yes, it's complicated).

Who is eligible for federal subsidies? Those who are single and make less than about $46,000, or are part of a family of four and make less than about $94,000, may receive a tax credit from the federal government to help pay their premium. (Note: These figures are subject to annual adjustments.)

Some deadlines:

• Starting January 2014, nongrandfathered, fully insured plans in the individual and small group markets and those in the exchanges were required to provide coverage of essential health benefits in 10 separate categories that reflect the scope of benefits covered by a typical employer plan. Self-insured small group plans, large group plans, and grandfathered plans are not required to offer essential health benefits.

To clarify, small employers (that's 50 or fewer full-time employees) are not required to provide health care to their workers, but if they do, the plans they offer must provide the above essential health benefits (and meet other specifications), unless, as also mentioned, the plans are self-insured or grandfathered.

• Starting Jan. 1, 2015, employers with the equivalent of 100 or more full-time employees must offer "affordable" care that meets minimum value specifications (again, as determined by minimum-value calculations) to 70 percent of their full-time employees, to fulfill the employer mandate. By 2016, large employers will need to provide coverage to at least 95 percent of their full-time workers.

• Starting Jan. 1, 2016, employers with the equivalent of 50 to 99 full-time employees may face penalties if they do not provide "affordable" care to at least 95 percent of their full-time employees as specified.

These deadlines were set in February 2014, when the Treasury Department issued its final mandate delay via a final rule and related fact sheet and Q&A on Employer Shared Responsibility Under the Affordable Care Act.

The required coverage must be provided to employees who work an average of 30 or more hours a week. The measurement period can be three to 12 months, with a subsequent stability period that generally cannot be shorter than six months or, if longer, the length of the can be three to 12 months, with a subsequent stability period that generally cannot be shorter than six months or, if longer, the length of the measurement period.

Out-of-Pocket Maximums, Too

Wait, there's more! Nongrandfathered group health plans also must comply with a new annual limit on cost sharing, known as an out-of-pocket (OOP) maximum, explains Sibson Consulting. For the 2015 plan year, the maximum is $6,600 for an individual and $13,200 for a family plan.

This limit must include deductibles, co-insurance, co-payments or similar charges for essential health benefits. This limit does not have to count premiums or billing amounts for non-network providers and other out-of-network cost-sharing, or spending for non-essential health benefits.

These limits apply to all nongrandfathered plans (grandfathered plans are those with unchanged major provisions since March 23, 2010, the date of the ACA's enactment, whether fully insured or self-funded, and regardless of size).

A special transition rule applies to the 2014 plan year if the plan uses multiple service providers to administer the plan’s benefits. That transition rule applies the maximum to the plan’s major medical benefit. If the plan’s other separately administered benefits (for instance, prescription drugs) apply an out-of-pocket maximum, that maximum also cannot exceed the allowed amount.

For the 2016 plan year, the OOP limits are $6,850 for self-only coverage and $13,700 for family coverage. However, effective for plan years beginning in 2016, nongrandfathered self-funded and large group health plans must apply an embedded self-only OOP maximum to each individual enrolled in family coverage if the plan’s family OOP maximum exceeds the ACA’s OOP limit for self-only coverage ($6,850 for 2016), as explained here.

Wrapping It Up

Still confused? Below is a reiteration of the various major plan design requirements along with an explanation of the related noncompliance penalties by Timothy Jost, J.D., a professor at the Washington and Lee University School of Law, from an article by Jost on the Health Affairs Blog:

"The employer mandate requires large employers to offer affordable and adequate insurance coverage to their full-time employees and their employee’s dependents or pay a penalty. The law actually imposes two different penalties. Under the statute, large employers that fail to offer “minimum essential coverage” to their full-time employees and dependents must pay a $2,000 penalty for every one of their full-time employees over the first 30 if any employee receives premium tax credits through the exchange (the 4980H(a) penalty). Large employers that fail to offer full-time employees coverage that is affordable (costs no more than 9.5 percent of an employee’s household gross income) and adequate (covering 60 percent or more of medical costs on average) face a $3,000 penalty for each individual employee who obtains premium tax credits (the 4980H(b) penalty). Small employers—employers with fewer than 50 full-time and full-time equivalent employees—are not required to offer coverage and are not subject to these penalties.
Employees who are offered affordable and adequate coverage by their employers are ineligible for premium tax credits. Employees who accept an offer of employer coverage, even if it is not affordable or adequate, are also ineligible. Employees who are not offered coverage, or who are offered coverage that is not affordable or adequate, may be eligible for premium tax credits if their household income is between 100 and 400 percent of the poverty level and they are not eligible for public insurance coverage. Employees whose income is below 138 percent of poverty in states that have expanded Medicaid are eligible for Medicaid, even if their employer offers coverage. Employers are not penalized for employees who receive Medicaid coverage."

Whew.

Stephen Miller, CEBS, is an online editor/manager for SHRM.​