Under the Affordable Care Act, employers with more than 50 employees are required to provide affordable health insurance to employees. The law defines “affordable” (the employee’s share of the premium cannot exceed 9.5 percent of the employee’s household income), but employers aren’t having an easy time figuring out what they’re required to do, since most people don’t make their household income known.
So how can an employer determine if it’s meeting the requirements? The New York Times recently published an article on the blog tackling that question.
The IRS has proposed three numbers that could substitute for actual household income. The first of these is the amount of wages the company reports for the employee of form W-2. So, as long as the employee’s share of the insurance cost is no more than 9.5 percent of Box 1 wages, the employer would be in bounds.
The second option is for the employer to calculate a baseline monthly wage based on the first month’s hourly rate or salary. This option isn’t available if the employer reduces the employee’s rate or salary over the course of the year, however.
The final option is to use the federal poverty level guidelines as the number that represents the household income.
As you probably noticed, all of these numbers are more conservative than household income is likely to be, meaning that the employer is picking up some slack in the cost for the convenience of not having to spend time doing research to find the actual household income number.
If an employee buys insurance on an exchange, however, the exchange would rely on actual household income, as estimated by the employee via his or her most recent tax return. There’s a chance that the employer’s coverage may fall under the “affordable” category by the optional calculations, but not “affordable” in actuality. In that case, the employee would get the tax credits to purchase the insurance, but the company would not have to pay the penalty.