Question About: Health Care Reform
We are subject to the Employer Mandate this year and are trying to determine how much we will need to contribute to our employees’ plans to make them “affordable” under the ACA. We would like to use the safe harbor method of using 9.5% of W-2 wages. Is it possible to use this method and charge employees different amounts for the same insurance based on their salaries?
A: answered by Jenny A, one of our HR Pros with over 15 years of experience.
Currently, there is uncertainty around this particular issue as there is no case law or guidance that tells us whether this contribution method will comply with ERISA’s anti-discrimination guidelines.
As you know, under the Affordable Care Act, one of the safe harbor methods for determining affordability is to use the 9.5% of the employee’s W-2 wages method. Another is to use the 9.5% of the employee’s monthly income method. These methods naturally lend themselves to employers wanting to set their contribution structure based on each employee’s earnings. And under the Affordable Care Act, doing so would seem to comply with the Act.
The problem lies in existing legislation, namely ERISA. Under the ERISA anti-discrimination guidelines, similarly situated employees must be treated consistently when it comes to contribution. Disparities in contribution structures must be supported by legitimate employment-based classes of employees. For example, ERISA allows one contribution schedule for hourly employees and another for salaried employees, as long as similarly situated employees are treated consistently. Another example is for employees in different geographical locations, so you could contribute 50% to employee only coverage for Georgia employees, and 75% of employee only coverage for California employees and still comply with ERISA.
So, using the method you described of each employee paying only 9.5% of their wages for the employee-only portion of their coverage certainly works for ACA compliance, but could potentially violate ERISA’s anti-discrimination guidelines. Of course, the employer could argue that each employee is paying the same percentage of wages, and that may be a good argument. Until a case on that point actually arises through, it is difficult for us to predict whether a court of law would consider this an ERISA violation. Therefore, our recommendation right now is not to use this contribution schedule. Rather, we recommend setting a blanket contribution amount for all similarly situated employees, publishing that amount in the official plan documents and remaining consistent with that contribution throughout this plan year. After that time, hopefully we will have some case law to review to see how the courts have decided on this issue.
As a side note, if you are looking for the most simple (though perhaps not most cost-effective) method of setting your contribution schedule to meet the affordability provisions of the ACA, my favorite method is the federal poverty level safe harbor. Rather than being a percentage of income, this method uses a flat amount that the employer can contribute in order to meet the ACA affordability provisions. For 2015, this amount is $1100. So as long as no full-time employee has to spend more than $1100/year for the employee-only portion of their health insurance coverage, you have met the affordability test. Again, this may not be the most cost-effective method, especially if the majority of your employees make more than the federal poverty level, but this is a fairly simple method to use, as it in no way hinges on the employee’s monthly or W-2 wages, which of course may fluctuate. It also allows for a bit of ease when completing the ACA repor ting at the end of the year.