On the Manifold Meanings of "Affordability" According to the Patient Protection and Affordable Care Act

The core policy goals of the Patient Protection and Affordable Care Act (the “Act”)—on which there is near universal consensus—are threefold: expand health care coverage; increase the quality of medical outcomes, and reduce costs. (The consensus quickly breaks down, however, when it come to the means whereby these goals might be achieved.) The first of these goals (the expansion of coverage) raises concerns about the affordability of coverage for low-income individuals. Affordability is germane to several of the Act’s provisions:

• Assessable payments under the Act’s employer shared responsibility rules can be avoided if the employer makes an offer of coverage that is, among other things, “affordable”;
• Low-income individuals can qualify for subsidized health insurance coverage in order to make coverage “affordable”; and
• The tax penalty imposed on individuals for failing to obtain health insurance coverage is waived where coverage is not “affordable.”

The test for affordability differs, however, for each provision.

Employer Shared Responsibility

The Act’s employer shared responsibility requirements apply to “applicable large employers” (i.e., an employer that “employed at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year”). Beginning in 2014, each applicable large employer is subject to an assessable payment if any full-time employee is certified as eligible to receive an applicable premium tax credit or cost-sharing reduction from a public insurance exchange and either:

• Internal Revenue Code § 4980H(a) Liability
• The employer fails to offer to all its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an “eligible employer-sponsored plan.” An eligible employer-sponsored plan for this purpose is any group health plan other than a plan that provides only excepted benefits (e.g., stand-alone vision or dental, hospital or fixed indemnity). Under this prong, if an employer fails to make an offer of coverage to its full-time employees, an assessable payment is imposed monthly in an amount equal to $166.67 multiplied by the number of the employer’s full-time employees, excluding the first 30.
• Or
• Internal Revenue Code § 4980H(b) Liability
• The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that, with respect to a full-time employee who qualifies for a premium tax credit or cost-sharing reduction, either is (i) unaffordable or (ii) does not provide minimum value. (Minimum value is a measure of a plan’s generosity. To provide minimum value, a plan must pay for at least 60% of plan costs. The remaining 40% are paid for by the covered individual in the form of co-pays, deductibles, co-insurance and other cost sharing features.) Under this prong, an assessable payment is imposed monthly in an amount equal to $250 multiplied by the number of employees who qualify for a premium tax credit (explained below).

According to recently proposed regulations, coverage is affordable for Code § 4980H purposes if the cost to the employee of self-only coverage does not exceed is 9.5% of the employees “household income.” This is so irrespective of whether he or she qualifies for some other level of coverage (e.g., self-plus dependents, family). Thus, despite that family coverage might require a larger employee premium, affordability for Code § 4980H purposes is determined based on the cost of self-only coverage. The Act defines “household income” to mean “modified adjusted gross income of the employee and any members of the employee’s family (including a spouse and dependents) who are required to file an income tax return.” Recognizing the employers would generally not know or care to know their employees’ household incomes, the proposed regulations permit employers to instead use one of three safe harbors as proxies: W-2, rate-of-pay or Federal Poverty Line.

Premium Tax Credits for Low-Income Individuals

Beginning in 2014, the Act amended the Internal Revenue Code to allow for refundable premium tax credits or cost-sharing reductions to help individuals and families afford health insurance coverage under a qualified health plan purchased through a public insurance exchange. These rules are found in Code § 36B. Tax credits are paid monthly to the issuer of the qualified health plan in which the individual enrolls. To be eligible for a premium tax credit, an individual must—

• Have household income for the taxable year between 100% and 400% of the federal poverty line (FPL) for the taxpayer’s family size;
• Not be claimed as a dependent by another taxpayer, and
• File a joint return, if married.

An individual who otherwise qualifies for subsidized coverage is not eligible for a premium tax credit if he or she is eligible for minimum essential coverage, which includes government-sponsored coverage such as Medicare, Medicaid, CHIP, TRICARE, and veterans’ health care. (Thus, in states that accept the expansion of Medicaid under the Act, individuals who qualify for premium tax credits are those with household income for the taxable year between 138% and 400% of the FPL.)

Minimum essential coverage can also include certain employer-provided coverage. Final regulations under Code § 36B clarify that an employee who is eligible for minimum essential coverage under an employer-sponsored group health plan is ineligible for subsidized coverage from a public exchange if the coverage provides minimum value and the employee premium cost for self-only coverage exceeds 9.5% of household income. Similarly, related individuals (e.g., spouse or dependents) who are eligible for minimum essential coverage under the an employer-sponsored group health plan are ineligible for subsidized coverage from a public exchange if the employee premium cost for self-only (not family) coverage does not exceed 9.5% of household income.

Whether an individual with access to employer-sponsored coverage is eligible for a premium tax credit under Code § 36B is independent of the determination of an employer’s liability for assessable payments under Code § 4980H.

Failure to Obtain Minimum Essential Coverage

The Act added new Code § 5000A, which generally requires U.S. citizens and green card holders to maintain minimum essential coverage for themselves and any nonexempt family members or include an additional payment with their federal income tax return. Certain categories of individuals are exempt, including those who do not have an affordable health insurance coverage option available. For this purpose, an individual lacks access to affordable coverage if the individual’s required contribution (determined on an annual basis) for minimum essential coverage exceeds a percentage (8% for 2014) of the individual’s household income, increased by any required contribution made through a cafeteria plan that is excluded from income.

Proposed regulations issued under Code § 5000A clarify that:

• For an individual who is eligible to purchase coverage under an eligible employer-sponsored plan, the required contribution is affordable based on the employee’s share of the annual premium for self-only coverage. (An eligible employer-sponsored plan includes COBRA coverage, but only where that coverage has been elected.) For a “related individual,” i.e., an individual who is eligible for coverage under an eligible employer-sponsored plan because of a relationship to an employee (and for whom a personal exemption deduction is claimed), the determination of whether the related individual’s coverage is affordable is made with reference to the employee’s required contribution for family coverage.
• For individuals who are ineligible to purchase coverage under an eligible employer-sponsored plan, the required contribution is the single lowest cost bronze plan available in the individual market through the public exchange serving the rating area in which the individual resides that would cover all members of the individual's non-exempt family reduced by any allowable premium tax credit for the taxable year (determined as if the individual enrolled in the plan for the entire taxable year).

The proposed regulations provide that the reference to an “employee” includes a former employee. Thus, an individual eligible to enroll in retiree coverage under a group health plan that is an eligible employer-sponsored plan is treated as eligible to purchase minimum essential coverage under an eligible employer-sponsored plan under the same rules applicable to current employees.

The following table summarizes the rules described above:
 

Affordability	Individual Shared Responsibility Code §5000A	Premium Subsidies Code §36B	Employer Shared Responsibility Code § 4980H
Individual	Coverage is affordable if an individual’s cost of coverage does not exceed 8% of the individual’s household income based on the cost of either— (i) Self-only premium under an eligible employer-sponsored plan. (ii) Self-only premium for the single lowest cost Bronze level coverage available in the individual market through a public insurance exchange serving the rating area in which the individual resides.	An eligible employer-sponsored plan is affordable for an employee if the portion of the annual premium the employee must pay for self-only coverage does not exceed 9.5% of the individual’s household income.	Coverage for an employee under an eligible employer-sponsored plan is affordable if the premium for self-only coverage is 9.5% or less of an employee’s W-2 wages, rate-of-pay equivalent income, or the FPL for a single individual.
Family/Related Individuals	Coverage is affordable if the cost of family coverage does not exceed 8% of a family member’s household income based on the cost of either— (i) Family premium under an eligible employer-sponsored plan. (ii) Family premium for the single lowest cost Bronze level plan available in the individual market through a public insurance exchange serving the rating area in which the family resides.	An eligible employer-sponsored plan is affordable for related individuals of an employee if the portion of the annual premium the employee must pay for self-only coverage does not exceed 9.5% of the taxpayer’s household income.	Coverage for related individuals under an eligible employer-sponsored plan is affordable if the premium for self-only coverage is 9.5% or less of an employee’s W-2 wages, rate-of-pay equivalent income, of the FPL for a single individual.

 

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