Affordability and the Affordable Care Act
September 22, 2014
By Scott Lyon, SBAM Senior Vice President
As we approach fall and the next round of open enrollment in the health insurance exchange/marketplace, we have had several questions from members regarding the definition of “affordability.” Under the Affordable Care Act, health insurance is deemed “affordable” if the employee’s share of the premium does not exceed 9.56% of the employee’s wages, for single/employee only coverage.
Here are a couple of examples that may help:
Example 1 – Single/Employee Only Coverage – Your company currently offers group health insurance and let’s say employee “Joe” earns $25,000 a year. Your group health plan will be considered affordable as long as Joe does not have to pay over $2,390 (9.65% of annual wages) a year for that coverage.
Now if your total cost of providing that insurance is $6,000 a year, the cost share can be as high 48.8% for the employee ($2,930/$6,000). The employee will pay just slightly less than half of the cost. If Joe earned $35,000 a year, his cost share portion could be as high as $3,246 a year, slightly more than half of the premium.
Example 2 – Family Coverage – Remember that under the Affordable Care Act, the employer is required to offer coverage to dependents under the age of 26, but the employer is not required to contribute anything to cover the cost of premium for the employee’s dependents. Joe still earns $25,000, but now rather than single coverage at a cost of $6,000 a year, the family premium is $13,500 a year. What changes for the employer – nothing. The employer’s share of the premium can still be a low as $2,390. What changes for the employee – everything. Joe’s employer can ask Joe to pay the entire amount over $2,390, in this case $$10,570. If Joe rejects this offer, his employer will not be subject to any potential fines under the employer mandate/shared responsibility provisions of the Affordable Care Act. This is because the offer meets the affordability test laid out in the Act.
It is also worth remembering and sharing this fact with your employees: Many think that they can reject their employer’s group health insurance offer and go to the Exchange/Marketplace for subsidized coverage – not so fast. Once the employer has offered health insurance that meets the affordability test described above, the employee and his family are no longer eligible for a premium subsidy at the health insurance exchange/marketplace. If they go to the exchange/marketplace, they are responsible for 100% of the premium, and adding insult to injury, they will be paying those premiums with after tax dollars. Whereas, employer offered coverage, as long as there is a Section 125 plan in place, offers the advantage of tax favored premium payments for your employees.
Reminder: All SBAM Premium members have access to SBAM Decision Point, our comprehensive guide to all things related to health care reform.