To pass muster with the ACA, and not trigger any penalties, the health plans of applicable large employers must pass three tests.
Those tests are:
- the minimum essential coverage test (meaning services are covered in at least 10 “essential” health categories)
- the minimum value test (meaning at least 60% of the cost of essential care is covered), and
- the affordability test (see below).
To be deemed “affordable” a plan’s individual-only coverage cost to an employee cannot exceed 9.66% of the employee’s household income in 2016 or 9.69% of the employee’s household income in 2017.
Proposed rule to change calculation
The IRS recently issued a proposed rule that may change the way you have to calculate your plan’s affordability, if you offer opt-out payments to employees in exchange for them declining coverage under your health plan.
Under the ACA, employers are permitted to provide a post-tax, opt-out payment to workers for waiving receipt of company-sponsored health coverage.
‘Unconditional’ v. ‘conditional’
If you choose to offer such opt-out payments, you’ll have to determine whether those payments are “unconditional” or “conditional.”
Under the new proposed rule, if your payment is “unconditional” — meaning the only requirement for an employee to receive the payment is that he or she waive your company-sponsored healthcare coverage — you must count it as a required employee contribution when calculating your health plan’s affordability.
Why must it count against your plan’s affordability? The IRS considers the payment compensation that employees must forgo in order to participate in the health plan.
On the other hand, “conditional” payments — i.e., those contingent upon an employee waiving coverage and proving he or she has alternative coverage (like through a spouse’s plan) — may be left out of the “affordability” calculation.
The rule, if made final as is, would apply to plan years beginning on or after Jan. 1, 2017. Currently, the proposal is going through the comment stage, after which it may be amended before being published as a final rule.
We’ll keep you posted.