By Michael D. Koppel, CPA, MBA, MSA, PFS, CITP
Gray, Gray & Gray, LLP
August 2013
The Patient Protection and Affordable Care Act (PPACA), more commonly called “Obamacare,” requires large employers to provide qualified health insurance for their full-time employees. Among other rules, the health insurance which is provided must be affordable for the employee.
“Large” employers are defined as those with 50 or more full-time equivalent employees. “Full-time” is defined as any employee who averages 30 hour per week or more.
As for the definition of “affordable” health care coverage, the law is very specific: the employee’s share of the premium cannot exceed 9.5 percent of the employee’s household income.
Whether or not the insurance provided is “affordable” can be very important for both the employer and the employee. For the employer it can determine if the business is subject to penalties for non-compliance. For the employee household income is the benchmark that determines if the employee qualifies for tax credits and subsidies available to help them purchase insurance in the new marketplaces created by the law.
Therein lies an issue. How is an employer supposed to determine an employee’s total household income? The answer: they cannot. An employee’s outside income, a spouse’s income, and other sources of income simply can’t be tracked and measured by an employer.
The Internal Revenue Service (IRS) has proposed three methods that employers can use instead of total household income to determine if they are meeting the affordability rule. These three alternatives are still only proposed solutions, and have not been officially adopted.
- A company can use the wages it reports to the IRS on Form W-2, box 1. Please note this amount excludes deferrals such as 401(k) or flexible spending account contributions.
- An alternative would be to calculate the amount based upon the first month’s hourly rate or salary. Using this method would avoid the reduction for 401(k) or other amounts. However, an issue with this method is that if the employer were to reduce the employee’s hours or wages subsequently it would not be accurate.
- The final alternative would be for the employer to use the federal poverty level for an individual, which is currently approximately $11,490.
It is important to notice that in all three alternatives the “affordable” contribution is based solely on income from the employer. It ignores any income the employee may earn from a second job, a spouse’s salary, or any investment or other income that contributes to total household income. This is clearly a disadvantage for the employer.
Recognizing this and other problems with reporting and definitions, the requirement that large employers provide health insurance for their full-time employees has been postponed until 2015. However, it is important that businesses stay on top of the rules that will be affecting them and what alternatives, if any, they have. The affordable health insurance requirement is potentially expensive for many businesses. We are aware of some employers that have already modified their hiring practices to avoid running up against higher costs and penalties.
Gray, Gray & Gray will continue to monitor this evolving situation. If you have any questions, please contact us at (781) 407-0300.