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IRS Confirms W-2 Safe Harbor to Determine Plan Affordability

As of 2014, the employer mandate will require employers with 50 or more employees pay a penalty if certain coverage conditions are not met.  One of these conditions is that employers must provide affordable benefits options to employees.

Coverage is deemed ‘affordable’ if the contribution required by the employee is 9.5% or less of the employees household income.  A safe harbor has been proposed by the IRS that would allow employers to use the W-2 wages of an employee to determine whether the coverage fits within the affordability guidelines, rather than use household income.


How the Safe Harbor Works

Employers must offer full-time employees (those who work 30 or more hours per week) and their dependents the chance to enroll in minimum essential coverage and ensure that the employee’s coverage for the self-only premium does not exceed 9.5% for their W-2 wages.  IRS Notice 2012-58 confirms that this safe harbor will be available through 2014. 

The ability to apply this safe harbor will be determined on an employee-by-employee basis, at the end of the calendar year and will take into consideration the employee’s particular contribution and W-2 wages.  If an employer wanted to use the safe harbor prospectively, they could set the employee contribution at a level that would not exceed 9.5% of their W-2 wages.

It is important to realize that the safe harbor does not affect an employee’s eligibility for a premium tax credit, which continues to be based on the affordability of employer-sponsored coverage relative to an employee’s household income, but is used for the purpose of determining whether or not an employee coverage plan falls within the affordability guidelines. In other words, an offer that is considered affordable under the W-2 safe harbor may be determined to be unaffordable  based on household income for purposes of determining whether the employee is eligible for a premium tax credit (i.e., no penalty even though the employee receives subsidized coverage in the Exchange).


Next Steps

Although this guidance is helpful to employers and will make it easier to look at contribution structures for benefit programs in 2014, further guidance is still needed in several areas, including the definition of a “minimum value” plan, and what providing to “substantially all” coverage to full-time employees means in order to avoid the penalty that applies if the correct amount of coverage is not provided.


Cambridge can help

As an employer it can be difficult to keep track of all of the regulations that come with health care reform.  Understanding how the W-2 safe harbor is defined by the IRS is crucial to understanding the effects the reforms will have on your organization.  For additional advice on how to best structure employee benefits and ensure compliance, please call us at 212.695.7463

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Arthur Grutt