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When Does 9.5% Equal 9.56%?

The answer is 2015. And here’s why.

First of All, Why 9.5%?

Anyone familiar with the finer points of the Affordable Care Act (“ACA”) will recognize the significance of the 9.5% figure. When applied to an employee’s total household income, this percentage produces the maximum premium for employee-only health coverage that will still be considered “affordable.” And such “affordability” is significant both for employees and for their employers (assuming an employer has sufficient full-time employees to be considered a “large employer”).

In the case of an employee, even an offer of affordable health coverage (that also meets the ACA’s 60% “minimum value” standard) will render the employee ineligible for the federal tax credits that might otherwise subsidize the premiums charged for coverage purchased through one of the Exchanges (also called Marketplaces). And for large employers, offering affordable (and minimum value) coverage to all full-time employees is a sure-fire way to avoid the ACA’s substantial “play-or-pay” penalties.

Because employers have no way of knowing an employee’s total household income, of course, the agencies charged with administering the ACA have developed three different “safe harbors” by which an employer can determine the affordability of its health coverage. Under these safe harbors, an employer may look solely at an employee’s monthly W-2 income, an employee’s hourly rate of pay times 130 (the monthly hours needed to meet the definition of a full-time employee), or the monthly federal poverty level for a one-person household. Nonetheless, each of these safe harbors still relies on the 9.5% threshold.

OK. So Why 9.56%?

So why will 9.5% equal 9.56% in 2015? Because the ACA’s statutory language requires the IRS to adjust this percentage (starting in 2015) to reflect any excess in (1) the rate of health insurance premium growth, over (2) the rate of income growth (with 2013 used as the base year for both measurements). And in Revenue Procedure 2014-37, the IRS has done exactly that.

According to the IRS, premiums have grown more rapidly than incomes. As a result, the 9.5% threshold must be adjusted upward. For 2015, the adjusted percentage will rise to 9.56%. This means that any “large employer” that is attempting to set employee-only premiums at the maximum level that will still satisfy the “affordability” standard should be using 9.56%, rather than 9.5%, in its safe-harbor affordability calculations.

Other Percentage Thresholds Will be Adjusted, As Well

The ACA calls for similar adjustments in related percentage thresholds. For instance, although an individual is generally exempt from the “individual mandate” (the requirement to have at least “minimum essential coverage” or face a tax penalty) if the premium for such coverage would exceed 8% of his or her household income, that 8% figure will be adjusted to 8.05% for 2015.

Similarly, the tax credit to help purchase coverage through an Exchange will be phased out at somewhat higher percentages of household income. Those percentages are specified in the recent Revenue Procedure.

Employers that have attempted to educate their employees on either the individual mandate or the federal premium subsidies should be aware of these adjusted percentages when issuing any new educational materials.