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Affordable Insurance and Safe Harbors Help ALEs Meet ACA Requirements
Employers subject to the health coverage mandate for Applicable Large Employers (ALEs) were required to file IRS Forms 1095C and 1094C beginning with the 2015 tax year. During this initial filing year, some employers faced fines because their benefit plans did not provide full-time employees with what the Affordable Care Act (ACA) defines as affordable insurance. To prevent future fines, keep in mind these three safe harbor options, which may satisfy the mandate’s affordability requirements, bring your benefit plan into compliance, and help you avoid penalties.
Offer full-time employees affordable insurance
As CLA assisted employers with their 2015 form preparation, we found that most understood that if they didn’t offer their full-time employees health insurance, they would still be required to meet their reporting obligation and face any resulting penalties. However, employers should note that offering health insurance to full-time employees doesn’t guarantee exemption from penalties. To avoid being fined, employers must identify all employees who are considered full-time status and offer them affordable insurance options.
Three safe harbors that satisfy affordability
ACA regulations provide three safe harbor options that an ALE can use to satisfy affordability. Use of a safe harbor option allows employers to avoid a penalty assessment if an employee opts out of employer provided coverage, goes through the exchange to receive health insurance, and receives a subsidy. Any subsidy received by the employee will need to be paid back if he or she was offered affordable employer sponsored coverage.
An ALE may apply a safe harbor to any reasonable category of employees if done uniformly and consistently. The safe harbors are based on the employee’s required contribution for the employer’s lowest cost self-only coverage, as follows:
- Form W-2 safe harbor: The required contribution for the year does not exceed 9.5 percent of the employee’s Form W-2 wages for the calendar year.
- Rate of pay safe harbor: The required monthly contribution does not exceed 9.5 percent of an amount equal to 130 hours multiplied by the employee’s hourly rate of pay.
- The federal poverty line safe harbor: The required monthly contribution does not exceed 9.5 percent of the federal poverty line for a single individual for the applicable calendar year divided by 12.
The affordability safe harbors are based on a percent standard, which is adjusted annually. It is expected that employers may rely on a safe harbor of 9.66 percent for plans beginning in 2016.
You may offer your employees various insurance plans to choose from. If the lowest cost plan offered to your employees (for employee-only coverage) meets the definition of “minimum essential coverage,” you can avoid penalties, provided you use one of the three mentioned safe harbors. Safe harbors are reported by the ALE on Form 1095C, Line 16, which reports a code 2F, 2G, or 2H for each month that the ALE used a safe harbor.
The cost of noncompliance
Penalties are assessed differently depending on whether you offer employees health insurance that meets the definition of minimum essential coverage. For employers not offering coverage, the penalty is $2,000 per full-time employee annually (excluding the first 30 full-time employees). However, for employers offering “unaffordable” coverage, the penalty is $3,000 per full-time employee receiving a federal subsidy. The penalty for offering unaffordable coverage is computed using a capped limitation. It is unlikely that an employer is aware if its employees are subsidy eligible; therefore, employers not using an IRS allowed safe harbor may be surprised when they are assessed a penalty.
Discuss safe harbors prior to your insurance renewal
Many employers begin renewing their health insurance policies as early as October for the following year. It may be beneficial for you, as an employer, to discuss these safe harbors with your insurance provider. Consider the employee’s share of the premium cost for the lowest cost plan offered to evaluate whether the plan is affordable. By taking a close look at your plans, you are less likely to be caught off guard should the IRS assess penalties later.
How we can help
For 2015 filing, the IRS assisted ALEs with their reporting requirements by issuing an extension for filing the necessary ACA forms. We cannot expect a similar extension for the 2016 filing period, and inaccurate forms will no longer be covered by the good faith clause, so understanding this mandate is critical. We can help identify your full-time employees and their insurance needs under the ACA mandate to help you maintain compliance, prepare for report filing, and avoid fines.