Large Employers Should Prepare for 2018 Tests

Employers preparing for 2018 plan year contributions want to pay special attention to the affordability test rules.

At this point, conventional wisdom and those “in the know” are convinced that the ACA (Affordable Care Act, also known as Obamacare) will continue to be the law of the land for 2018.

One of the ACA provisions to which employers pay close attention is the affordability test. This test determines if the employee’s insurance is “affordable”. If the coverage is not “affordable”, the employee is eligible for a subsidy on the Exchange and the employer may also be subject to substantial penalties should the employee purchase subsidized insurance on the Exchange.

Typically this applies only to Employers with 50 or more employees. (There are a series of tests to determine if the employer has 50 employees as well-nothing is simple!)

There are three “safe harbor” tests that an employer may use to determine if the lowest cost plan is affordable: Form W-2, Rate of pay, and Federal poverty line (FPL). These tests are applied to the lowest cost plan that meets the minimum value standards established by the ACA. It’s pretty tough to find a major insurer offering a plan that does not meet those standards.

If your firm is using one of these safe harbors, now is a good time to review your premium sharing calculations in anticipation of open enrollment for 2018 plan years. For 2018, the ACA affordability percentage drops from 9.69% to 9.56%.

Employers using the Form W-2 safe harbor may need to lower the employee contribution rate for single coverage in the lowest cost plan. A firm using the rate-of-pay safe harbor and not planning an increase in hourly wage, may need to lower the employee contribution rate as well.

The W-2 safe harbor simply applies the percentage to Box 1 of the employee’s W-2 to make sure that the plan is affordable. Multiply the total in this box by 9.69% (2017) divide by 12 and that is the maximum amount the employee can pay for “employee only coverage” to make the plan affordable.

California minimum wage for employers with over 26 employees is $11.00 per hour in 2018, up from $10.50 in 2017. so those using “rate of pay” may actually be able to increase the employee contribution.

Rate-of-pay example, using minimum wage and 1560 hours for the year:

Plan Year Beginning Lowest Box 1, W-2 Wage Affordability Percentage Months Safe Harbor Ceiling
2017 $16,380 x 9.69% ÷ 12 = $132.27
2018 $17,160 x 9.56% ÷ 12 = $136.71

The FPL safe harbor multiplies the percentage by the single Federal Poverty Level. In 2017, the figure is $12,060. At 9.69% over 12 months, the 2017 employee contribution is $97.38. If FPL remained at $12,060 , the employee contribution must be reduced to $96.08.

While the FPL safe harbor is often the simplest approach, it could save an employer to use the minimum wage calculation or W-2 safe harbor based on the lowest levels of pay in the company.

Another reminder: In preparation for the Medicare fall open enrollment period, employers sponsoring group health plans that include prescription drug coverage are required to notify all Medicare-eligible individuals whether their coverage is creditable (i.e., that the coverage is expected to pay, on average, as much as the standard Medicare prescription drug coverage).

This written disclosure notice must be provided annually, prior to October 15, and at various other times as required under the law, to the following individuals:

  • Medicare-eligible active working individuals and their dependents;
  • Medicare-eligible COBRA individuals and their dependents;
  • Medicare-eligible disabled individuals covered under an employer's prescription drug plan; and
  • Any retirees and their dependents.

Model notices are available from the Centers for Medicare & Medicaid Services (CMS) or from your benefits broker/consultant.

Additionally, employers are required to complete an online disclosure to CMS to report the creditable coverage status of their prescription drug plans. This disclosure is also required annually, no later than 60 days from the beginning of a plan year, and at certain other times.

Margaret R. Beck
Margaret Beck  CLU, ChFC, CEBS started her insurance practice in Redding in 1978. As an insurance broker/consultant,  she represents businesses and individuals as their advocate.  She assists in choosing proper products, compliance with complex benefit laws and claims issues once coverage is placed. All information in her column is provided to the best of her knowledge, subject to final regulation by the respective agencies. Questions to be answered in this column can be submitted to Beck's column is also published in the Redding Record Searchlight.
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1 Response

  1. Tim says:

    Sounds like a fun way to spend a Sunday!

    Who wants employees? In 1985, 1 in 50 people owned a business with employees. Today that ratio has dropped to 1 in 75. Instead we see more and more 1-person “nonemployer” businesses reflecting the rise of the “gig economy” — a euphemism for sidestepping employment law via 1099 “independent” contractors… What progress!

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