In an effort to clarify PPACA affordability, the IRS released two new notices that are as clear as mud.
The first notice explains that in order to meet the affordability standard, for employees earning less than 400% of the federal poverty level, an employer can charge up to 9.5% of wages for employee-only coverage. Coverage meeting the minimum essential benefits test must be offered to all full time employees and include an option to cover dependent children up to age 26. Note that the 9.5% threshold applies whether or not children are covered. If the affordability test is met, all eligible family members are ineligible for a subsidy.
The second notice speaks to the individual mandate penalty. Here, affordability is based on whether the cost of employer coverage exceeds 8% of family income.
Consider this: An employee earns $35,000 per year. The employer offers minimum essential coverage to her and her children but her unemployed spouse is ineligible. The wife’s employer charges $275 per month for employee-only coverage, which is—barely—less than 9.5% of wages and therefore “affordable.” The employer charges $500 per month to include the children.
The employee and her children are ineligible for subsidies under the exchange since they have available affordable employer coverage (the employee-only coverage is less than 9.5% of earnings). Her husband would be eligible for exchange subsidies because the family income is below 400% of the federal poverty level. Because of the income level, the children may be eligible for state-sponsored subsidized S-CHIP plans.
But if the employee waives coverage and the family doesn’t purchase any coverage at all, they wouldn’t be subject to the individual mandate penalty tax since the total cost of employer coverage ($6,300) is more than 8% of family income.
Got it? Think your employees will?