IRS Releases Further Guidance on Application of the ACA's Affordability Calculation Under the Employer Mandate

Category: Private Education Matters
Date: Jun 30, 2016 07:05 PM

The IRS recently released guidance on the application of group health plan market reform provisions (Notice 2015-87).  The Notice contains twenty-six FAQs on a wide variety of topics.  Some highlights are included below.  LCW's Special Bulletin on this Notice that includes more details is available here.

Flex Contributions Only Make Premiums Affordable under the Employer Mandate if They Qualify as a "Health Flex Contribution"

According to the statute, an amount is a "health flex contribution" if (1) the employee may not opt to receive the amount as a taxable benefit, (2) the employee may use the amount to pay for minimum essential coverage, and (3) the employee may use the amount exclusively to pay for medical care.  Therefore, employers who do not have a "health flex contribution" cannot use that cash to offset the amount that the employee pays toward premium contributions when calculating affordability.  Also, if the flex contribution can go toward expenses other than medical care, it is not a "health flex contribution" and cannot be used to reduce the employee's premium contribution when calculating affordability for the employer mandate.

The IRS will provide a period for transition relief.  Employers with plan years beginning before January 1, 2017 will be allowed to reduce the amount of an employee's required contribution by a non-health flex contribution when determining affordability for the employer mandate.  When reporting data from plan years 2015 and 2016, an employer can use any flex credits to reduce the contribution.  However, in the future, this will not be permitted.

Cash in Lieu Does Not Help Make Premiums Affordable

Cash in lieu incentives cannot be applied to the affordability analysis.  And, in fact, it might be treated as a salary reduction, making premiums even more unaffordable.  The IRS will issue proposed regulations on this topic that will also address the treatment of opt out payments conditioned on the employee providing proof of other coverage.

Transition relief provides that opt out arrangements adopted before December 16, 2015 do not increase the amount of the employee's required contribution for reporting or for the employer mandate.  Employees should not renew any existing opt out/cash in lieu arrangements from this point forward without considering the serious consequences this arrangement could have with regard to the employer mandate.

Employer Mandate Affordability Safe Harbors – Increase in Percentage

The Treasury and IRS intend to amend the regulations to provide that the 9.5% threshold under the Form W-2, Rate of Pay, and Federal Poverty Line safe harbors, is now 9.56% for 2015 plan years.  This increase in percentage is consistent with the individual affordability analysis used by the exchange.  The amount will increase again to 9.66% for plan years beginning in 2016.  Employers should recalculate their affordability immediately to make sure that their 2015 plan is affordable using the 9.56% figure under the employer-chosen safe harbor.

ACA Reporting Relief

The IRS will not impose penalties on Applicable Large Employers who make a good faith effort to comply with reporting on Forms 1094-C and 1095-C and statements provided to employees.  The returns and statements must still be timely unless certain reasonable cause standards are met.

Notice 2015-87 can be found at:

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