PPACA's affordability definition remains unclear

February 1, 2012

When it comes to health insurance and the Patient Protection and Affordable Care Act, defintion "affordable" can be a complex and confounding task.

If they don't, they face a monthly penalty, which is triggered when any full-time employee receives a premium tax credit through the American Health Benefits Exchange (AHBE) in their state. Initial rules proposed by the U.S. Treasury Department in August 2011 would deem an employer's offer affordable if the employee's share of the premium for the cheapest self-only plan available to them represented 9.5% or less of the employee's annual household income.

Business groups have subsequently raised the very legitimate question of how, in determining the affordability of the plans they offer, employers could be expected to know an employee's total household income. Income could include revenue from several other sources, including pay from additional employers and the earnings of other family members. Treasury made a nod to this dilemma by indicating that it intends to establish an "employer safe harbor," wherein large employers would be deemed exempt from penalties, provided they can document that the employee's portion is 9.5% or less of W-2 wages for each employee.

The second affordability standard comes into play when an employee who is offered insurance through his or her employer attempts instead to access a federal subsidy to purchase insurance through the AHBE, on the grounds that the employer's offering is "unaffordable." These individuals must demonstrate that their share of the premium would exceed 9.5% of their total household income (the modified adjusted gross income of an individual and any dependents who are required to file a tax return); not the lower bar of the employee's W-2 wages that is used to calculate affordability for the "shared responsibility" penalties mentioned earlier.

While the income calculation in this instance expands to include all members of a household, the figure used to represent the cost of health insurance remains the same as in the first standard; the employee's share of the lowest-cost, self-only plan.

Thus affordability in both standards ignores the significantly higher cost of family coverage, which is historically two to three times greater. Ironically, the same proposed rule that contained this wrinkle implicitly acknowledged the price differential between the two types of coverage by using the cost of a family policy in calculating the size of the tax credit that an eligible taxpayer would receive through the AHBE.

Affordability definitions are guaranteed to sow confusion among those attempting to understand their options and obligations. They will add to the difficult path PPACA implementation already faces.

Cindy Gillespie is managing director for McKenna Long & Aldridge LLP.

Frank Micciche is senior advisor for McKenna Long & Aldridge LLP.

This column is written for informational purposes only and should not be construed as legal advice.