9.5%? Who Picked That Number? And Is Dependent Coverage Off The Table?

WASHINGTON—Employers will not face health care reform law penalties if they do not offer affordable coverage to employees’ dependents and they may not even have to extend coverage to dependents, depending on the outcome of regulatory guidance.Under the Patient Protection and Affordable Care Act, employers will be assessed an annual $3,000 per employee penalty starting in 2014 if the health care coverage they provide is not affordable.The penalty would apply in cases where an employee’s health insurance premium contribution exceeds 9.5% of household income, making them eligible for federal premium subsidies to buy coverage through state insurance exchanges.A safe harbor provision that the Internal Revenue Service unveiled this month for public comment to pass this health care reform law requirement affirmed what benefit experts had thought for some time: that the affordability test only will apply to employee or self-only coverage.Group health care plans would be able to qualify for the safe harbor—shielding them from the $3,000 per employee affordability penalty—so long as the premiums employees are required to pay for self-only coverage in the least costly plan available to them does not exceed 9.5% of their wages.Excluding dependent coverage from the affordability test in the IRS safe harbor was deliberate because the affordability requirement applies only to coverage of employees, experts say.“That is the way we read the statute,” said Ed Fensholt, senior vp and director of compliance services for Lockton Benefit Group in Kansas City, Mo.

“What problem was Congress trying to address? The focus was on trying to get affordable coverage to the employee,” said Paul Dennett, senior-vp health care reform with the American Benefits Council in Washington.

And it’s possible—depending on how regulators interpret a murky provision of the law imposing a $2,000 per-employee penalty on employers that do not offer coverage—that the penalty only would be imposed if coverage is not extended to employees.

“Our reading of the statute is that employers are required to offer coverage only to full-time employees,” consultant Aon Hewitt Inc. wrote in a letter to the IRS.

Some say, though, that the law is not clear on that point and cries out for clarification. The law says penalties apply for employers that do not offer coverage to their full-time employees, but puts parentheses around the succeeding words “and their dependents.”

While the law’s wording is not a “model of clarity” and is open to “multiple interpretations, we believe the best reading of the language is that an employer would not be liable for the penalty…so long as any full-time employee is offered either self-only coverage or coverage that includes ‘their dependents,’” the American Benefits Council said in its letter to the IRS.

“What the parentheses mean is the million-dollar question,” said Gretchen Young, senior vp-health care policy with the ERISA Industry Committee in Washington.

Others say it will take the IRS to resolve the issue.

“What do the parentheses mean? Why did lawmakers decide to put the words ‘and their dependents’ in parentheses? Like so many provisions in the law, we will not know for sure until there is official guidance,” said Amy Bergner, a partner with Mercer L.L.C. in Washington.

Just because the health care reform law affordability penalties may not apply to dependent coverage or—depending on future guidance—whether penalties only are imposed when employee-only coverage is offered, does not automatically open the door for employers to dramatically increase employee premium contributions for dependent coverage or drop the coverage.

“You can’t view this in a vacuum. There are other elements to consider” such as competition, said Andy Anderson, a partner with law firm Morgan, Lewis & Bockius L.L.P. in Chicago.

“Employees expect this coverage to be offered,” said Michael Thompson, a principal with PricewaterhouseCoopers L.L.P. in New York.

If an employer shifted the entire cost of dependent coverage to employees, dependents would not be eligible for federal premium subsidies so long as employee or self-only coverage premium contributions met the affordability test, the IRS said in regulations it proposed in August largely relating to insurance exchanges.

However, experts interpret the rules as allowing dependents in families whose incomes are below certain levels set by the reform law to receive the premium subsidies if they are not eligible for employer-provided coverage.