H&W: Affordability of Employer-Sponsored Health Coverage

This is the second in a series of blogs covering IRS Notice 2015-87.  In our first blog, we discussed important considerations regarding the integration of HRAs and similar arrangements into an employer’s group health plan.  This installment addresses guidance on the affordability of employer-sponsored health coverage.

Recall that a large employer is subject to a shared-responsibility assessment if an employee receives a premium tax credit for a given month.  An employee who is eligible for coverage under the employer’s health plan will not be entitled to a tax credit if the employer’s plan is “affordable” and provides minimum value.

Coverage is considered affordable if the employee’s required contribution for coverage under the plan is 9.5 percent (as adjusted annually) or less of the employee’s household income.   An employee’s required contribution is the portion of the annual premium that would be paid by the individual (whether paid through salary reduction or otherwise) for self-only coverage.

In the case of an integrated HRA, amounts made available for the current plan year under an HRA that an employee may use to pay premiums for an eligible employer-sponsored plan, or that an employee may use to pay premiums for an eligible employer-sponsored plan and also may use for cost-sharing and/or for other health benefits not covered by that plan, are counted toward the employee’s required contribution (and thus reduce the dollar amount of that required contribution).

Illustration:  Assume that an employee’s household income is $1,700 per month.  Coverage under the employer’s health plan is $200 per month for self-only coverage and is therefore not affordable since it exceeds 9.5% of the employee’s household income ($1,700 x .095 = 161.50).  However, if the employer offers an HRA that makes $100 per month newly available to the employee to use to cover the cost of premiums (and optionally to also pay for cost-sharing and other non-covered medical expenses), the actual cost to the employee is reduced by $100 to $100 per month and the coverage is now considered affordable.

In the case of a cafeteria plan, employer flex contributions will reduce the amount of the employee’s required contributions only if (1) the employee may not opt to receive the amount as a taxable benefit; (2) the employee may use the amount to pay for minimum essential coverage; and (3) the employee may use the amount exclusively to pay for medical care.  Accordingly, an employer’s flex contribution will not reduce the employee’s contribution if:

• The employee can elect to receive the amount as cash.
• The employee can elect to receive the amount for non-health care benefits.

Transition relief is available for plan years beginning before January 1, 2017.  Employer flex contributions that may be used by an employee for health coverage, but may also be used for cash or other non-health benefits will be treated as reducing an employee’s contribution.  This only applies to flexible contributions arrangements that have been adopted on or before December 16, 2015.

Some employers may have programs which provide cash incentives to employees to decline the employer’s health plan.  In those cases, the opt-out amount is added to the employee’s cost of coverage.

Illustration: An employer has a health plan that requires employee contributions of $200 per month; however, the employer also offers employees who decline coverage an additional $100 per month in taxable wages.  The cost of coverage to the employee would be deemed to be effectively $300 per month.

The IRS intends to include this guidance in regulations which will only apply for periods following their issuance.  That said, the IRS notes that it expects the final regulations to require inclusion of opt-out wages under any arrangement that is adopted after December 16, 2015.

The IRS notes that this rule may create problems with respect to employer payments for fringe benefits made pursuant to the McNamara-O’Hara Service Contract Act (“SCA”), the Davis-Bacon Act, or the Davis-Bacon Related Acts (collectively with the Davis-Bacon Act, the “DBRA”).  Employees who decline health coverage under these acts are entitled to substantial additional cash payments that would make it difficult for an employer to meet the affordability rules.  Accordingly, until further guidance is issued, employer fringe benefit payments under these statutes that are available to employees to pay for coverage under an eligible employer-sponsored plan will be treated as reducing the employee’s required contribution for participation in that eligible employer-sponsored plan, but only to the extent the amount of the payment does not exceed the amount required to satisfy the requirement to provide fringe benefit payments under the statutes.