Students of statistics are taught about cause and effect. In
correlating two facts you are generally looking for the effect one has
on the other. But just because two things seem to rise and fall
together does not mean the two are directly related.
For example it is a common fact that drowning deaths track with ice
cream sales. There are more drowning deaths when ice cream sales
increase. Does this mean ice cream causes people to drown? Not
likely. Both increase when we have hot sunny weather. The ice cream
sale did not cause the drowning, it is simply a result of a common
factor.
Subsidies and safe harbors are much the same. They are effected by
common factors, but are not directly related to each other and are in
fact mutually exclusive in some cases. For example there are cases
where an employee may receive a subsidy and the employer is still safe
harbored from penalty. There are cases when an employee is refused a
subsidy even when the employer was clearly not safe harbored. One does
not determine the other.
When determining subsidies and safe harbors you must look at this
from two different perspectives. One is the perspective of the
employee; the other is perspective of the employer. One has some effect
on the others fate, but they do not have complete control and cannot
determine it for the other.
First, from the perspective of the employee trying to seek a subsidy. The first question is, Have they enrolled in coverage at work?
• If they have coverage at work by enrolling in any employer
sponsored health plan that is at least MEC (minimum essential coverage),
the employee will not be eligible to receive a subsidy. They may later
drop coverage at work (if after tax or due to a life event), but for
the months they were enrolled in an employer sponsored health plan there
will be no subsidy available to them.
• If they waived coverage at work, the next question would be, Is the
plan MV (Minimum Value) and Affordable? The MV question is easy to
know, the plan administrator can answer that one. The affordable
question is not easy to know. The employer has no way to know if the
plan is affordable because they do not know the entire financial
situation in the employee’s home. They only know what the employee
earns in their job which is not enough information to determine
affordability to the employee and his dependents.
o If the plan is not MV, affordability does not matter. The employee
may apply at the exchange and if eligible based on their household
financials, they may receive a subsidy. (They waived so they are not on
insurance at work.)
o If the employer sponsored plan is MV, affordability does matter.
The only reason the employee can waive MV coverage at work and still
seek a subsidy at the exchange is if the MV plan offered is not
affordable based on the employee’s household financials (not his wages
at work). This does not answer the question of if the employer will get a
penalty, it only answers if the employee may get a subsidy.
o If the plan is MV and it is affordable based on the employees own
financial profile, (not simply his wages at work), then they would not
be eligible for a premium subsidy. Because the employee was offered an
affordable plan at work, they are not subsidy eligible.
Next is
the perspective of the employer looking to establish a safe harbor.
The first question is as before, Did the employee enroll in the coverage
offered?
• If the employee enrolled in coverage at work and is now enrolled.
The employee will not be eligible to receive a subsidy as long as the
employer sponsored plan offered is at least Minimal Essential Coverage.
They may drop coverage at work, but for the months they were enrolled
the employer is safe.
• If the employee waived, the next question is if the plan offered
was MV and if the employer is safe harbored. Notice I did not say
affordable, I said safe harbored. This is a distinct point.
o If the plan is not MV, safe harbors do not apply. (They waived so
they are not on insurance at work.) The employee may apply at the
exchange and if eligible based on their own household financials may
receive a subsidy. If they receive a subsidy then the employer will
receive a penalty for that month, unless the employee is in a
non-assessed period such as 90 day wait period or initial measurement
period and associated administrative period.
o If the plan is MV then the next question is if the employer is safe
harbored. If the employer is safe harbored then it does not matter if
the employee receives a subsidy the employer will not receive a
penalty. The employee may receive a subsidy and the employer may be
safe harbored at the same time. The three safe harbors are:
1. IFPL Safe harbor (individual cost of insurance is less than 9.5% of the Individual Federal Poverty Level)
2. Pay Rate Safe Harbor (individual cost of insurance is less than 9.5% of the employee’s hourly pay rate x 30 hours per week)
3. W2 Safe Harbor (individual cost is less than 9.5% of the employee’s W2, Box 1 wages)
So from the perspective of the employee:
• Don’t enroll at work if you plan to go to the exchange, but be
careful. If your employers plan is MV and you can afford it, then you
will not be eligible for a subsidy from the exchange. You will be
locked out no matter how good or bad the insurance is. Also, be very
careful if it is pre-taxed, you may not be able to drop it until open
enrollment if it is pre-taxed.
• If your employer offers you a plan that is MV you will need to
determine if it is affordable to you (not if it is safe harbored) before
you waive it. If you waive an affordable MV plan you will be locked
out of the exchange subsidies.
From the perspective of the employer:
• If your employee enrolls in MEC or better you are safe for every
month they are enrolled. If you offer it pre-tax, then the employee can
only drop it during open enrollment or due to a special life event by
Section 125 rules.
• If you are not offering a plan that is at least MEC to 70% of your
full time employees, and one of your full time employees goes to the
exchange and if based on their household financials they get a subsidy
you will be subject to the A penalty. Safe harbors do not apply.
• If you are not offering a plan that is at least MV, your employee
may waive and go to the exchange and if based on their household
financial profile they get a subsidy you will be subject to the B
penalty if you are not already subject to the A penalty. No safe harbor
applies.
• If you are offering a plan that is MV, then regardless if you are
safe harbored or not, your employee may apply at the exchange and if
your plan is found to be unaffordable based on the employees household
financials then the employee may receive a subsidy. If this happens you
will want to be safe harbored to avoid the penalty. You are safe
harbored if the cost to the individual employees is less than 9.5% of
the IFPL, Pay Rate or W2 safe harbor, depending on which of the three
you apply. This is provided you are not subject to the A penalty. (You
failed to offer it to 70% of your Full Time employees.)
This is complicated and when you read the regulations you always have
to put yourself in the place of either the employer or the employee.
Words like affordable
relate to the employee’s ability to afford the insurance offered, only
the employee knows all the information needed to determine this fact.
Words like safe harbor
relate to the employers ability to avoid a penalty. This is based on
the cost of insurance versus the employee’s payroll earnings with your
company. They can both happen at the same time. The employee can
receive a subsidy and the employer can be safe harbored at the same
time. Or, the employee may not receive a subsidy even when the employer
is clearly not safe harbored. The two are independent of each other
but still closely related.
When you are planning your ACA Strategy keep in mind you are working
from the employer’s perspective. Your goal is to mitigate the risks
associated with the Pay or Play mandate that has been presented to you
by the IRS. You will need to make choices based on your company’s
unique situation to put your company in the best possible position to
mitigate the risks present in our employee population while also
maintaining a selection of benefits that will attract and retain your
best employees.
Good luck,
Stephen Schram is Principal, CTO with ACA
Compliance Services Inc., author of Trax Compliance Software for
Employers and frequent contributor to ASA Central Network. For
questions regarding this article or general ACA compliance questions
feel free to contact the author by email: stephen.schram@trax-aca.com (www.trax-aca.com)