Common Sense Compliance
USI is proud to introduce a new monthly educational outline: Common Sense Compliance. Our goal is to provide brief background insight on employee benefits compliance topics and terminology to help keep you in-the-know.
The Math Behind Health Care Reform
Health Care Reform refers to two separate laws, the Patient Protection and Affordable Care Act (“PPACA”), signed into law on March 23, 2010, and the Health Care and Education Reconciliation Act of 2010 (“HCERA”), signed into law on March 30, 2010.
These laws impose a number of requirements; many of which involve calculating fees, percentages, or penalties – inevitably having to do some math. Compliance concerns include:
1) Improper Reporting
2) Overpayment/Underpayment of fees
3) Potential Penalties and/or Excise Tax
4) Loss of Business Income can arise if these calculations are improperly made
Take for example calculating the affordability of health coverage per the Employer Mandate. In order to avoid either Subsection (a) or Subsection (b) Penalties, the employer must ensure the coverage offered is “affordable.” Under Federal Regulation, coverage is affordable if the employee premium for self-only coverage does not exceed 9.5% of the employee’s annual household income. There are three safe harbors permitted to determine affordability: 1) Federal Poverty Guideline; 2) Rate of Pay; 3) W2.
The first mistake is calculating the affordability of coverage based on the 9.5% safe harbor rate, rather than the current rate of 9.66% (9.5% was for 2014; 9.56% for 2015; and 9.66% is for 2016), which can lead to lost income for the employer and an unforeseen benefit for the employee.
Other mistakes relate to the Rate of Pay safe harbor, which requires the use of the hourly rate of an employee, but the employer must use 130 hours regardless of hours worked. This will provide a monthly salary from which to assess the 9.66% maximum employee premium. Many employers use actual hours worked, which may be more or less than 130 and may cause an unstable rate.
Finally, many employers use the W2 Safe Harbor by calculating 9.66% of the annual wages. This would be incorrect. The W2 Safe Harbor requires the use of Box 1 of the W2, which includes an employee’s wages for the year, but excludes pre-tax benefits. As such, an employer must be very careful, otherwise the premium may be higher than the required 9.66%.
If an employer fails to offer coverage that is affordable, the employer would be subject to penalties if an employee goes to the exchange and receives a premium subsidy. Most individuals are eligible for a premium subsidy. However, by calculating affordability incorrectly, an employer would not be able to dispute a penalty assessment by the Internal Revenue Service (IRS).