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IRS Increases 9.5% Affordability Threshold—Or Did It?

On July 24, 2014, the Internal Revenue Service (IRS) released three Revenue Procedures (2014-46, 2014-37, and 2014-41), which provide guidance to individuals on their obligation to maintain minimum essential coverage (MEC) under the Affordable Care Act’s (ACA) so-called “individual mandate.”

Most notably for employers is that, in Revenue Procedure 2014-37, the IRS increased the threshold for determining whether an employer has offered affordable coverage to an employee.  For these purposes, the IRS increased the percentage of an employee’s household income that can be charged for group health insurance and still be considered affordable for purposes of the ACA’s “pay-or-play” requirements.  The IRS guidance increases the percentage from 9.5% to 9.56%.  In other words, an employer assessing the affordability for employee-only coverage for its least expensive plan in 2015 can require an employee to pay up to 9.56% of his or her household income and the insurance will still be considered affordable.

It has been widely reported that the IRS has increased the affordability percentage in all cases from 9.5% to 9.56%.  This is not necessarily true.

By way of background, the IRS had previously acknowledged that when it comes to having employers measure “affordability” of health coverage, tracking an employee’s household income would be difficult, if not impossible.  Responding to this concern, the IRS released regulations that permitted employers to use one of three safe harbors to determine affordability.  The three safe harbors permit an employer to measure affordability based on whether the applicable premium exceeds 9.5% of W-2 income, an employee’s Rate of Pay or a measure of the Federal Poverty Level.  That is, an employer using one of the safe harbors would not need to ask about an employee’s household income to determine whether the insurance is affordable for purposes of the ACA; it would simply take the applicable safe harbor, multiply by 9.5% and measure the result against the premium for self-only coverage.

Some vendors, consultants and others have announced that employers can now use the increased 9.56% to determine whether coverage is affordable for purposes of the safe harbor.  Based on the literal regulatory rules, this is not correct.

The reason this is not true is that the IRS regulations on affordability have “hard-wired” the 9.5% standard into those regulations; the regulations do not cross-reference to the statutory reference for affordability.  As the IRS continues to index the affordability measure for household income over time, as is required by the ACA, a concomitant change to the percentage established in the regulations will be required or else these two percentages will very quickly become dramatically out-of-sync.

Some type of announcement from the IRS increasing the regulatory 9.5% threshold to the statutory 9.56% threshold for the applicable safe harbors would be welcome.  In the meantime, employers planning on complying with the regulatory safe harbor rules should cap premiums based on the literal terms of those regulations.

© 2021 Proskauer Rose LLP. National Law Review, Volume IV, Number 218
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About this Author

Paul Hamburger Employee Benefits Law Attorney Proskauer Rose Law Firm
Partner

Paul M. Hamburger is co-chair of the Employee Benefits & Executive Compensation Group and head of the Washington, DC office. Paul is also a leader of the Practice Center’s health and welfare subgroup and a member of Proskauer’s Health Care Reform Task Force.

Paul provides technical knowledge and advice to employers on all aspects of their employee benefit programs, and advises employee benefit plan trustees and service providers on ERISA and employee benefit plan-related matters. He has extensive experience in negotiating service provider...

202.416.5850
Peter Marathas, Attorney, Proskauer Law Firm
Partner

Peter Marathas is a Partner in the Employee Benefits, Executive Compensation & ERISA Litigation Practice Center and heads both the Employee Benefits Practice in the Boston office and Proskauer’s Health Care Reform Task Force. As demonstrated by his “Band One” ranking in Chambers USA, Peter has a solid reputation as being among a short list of U.S. employee benefits lawyers who can guide his clients through complex federal and state benefits laws and tax, securities, ERISA and corporate governance issues in a...

617.526.9704
Stacy H Barrow, Proskauer Rose Law Firm, Labor Employment Attorney
Associate

Stacy H. Barrow is an Associate in the Labor & Employment Law Department and a member of the Employee Benefits, Executive Compensation and ERISA Litigation Practice Center and the Health Care Reform Task Force, resident in the Boston office.

617-526-9648
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