Feb. 23, 2016 – Compliance Observer Alert – IRS Clarification on ACA Safe Harbors

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February 23, 2016

IRS Clarification on ACA Safe Harbors

As we addressed in our January 2016 Newsletter, at the very end of 2015 the IRS jolted into high gear. Among other things, the IRS pushed back a few deadlines for the 2015 Affordable Care Act (ACA) reporting. This was a holiday blessing for employers that were still trying to keep up with the huge record keeping requirements.

Additionally, the IRS also issued a much desired explanation on income percentages for ACA’s affordability safe harbors. Pursuant to Revenue Procedure 2014-37, the IRS increased the percentage of employee household income to 9.56%, the amount that can be spent on group health insurance and yet still considered affordable under the ACA. This amount has now increased to 9.66% in 2016. Due to the fact that it can be challenging to establish an employee household income, ACA regulations allow employers to choose any of the three alternate safe harbors when determining whether or not their group health insurance is affordable under ACA. These three alternative safe harbors are: percentage of employee W-2 income, percentage of employee rate of pay, and percentage of federal poverty line.

With the release of Revenue Procedure 2014-37many employers assumed the 9.56% rate applied to the three affordability safe harbors and, as such, began using the 9.56% in their calculations for plan years beginning in 2015. However, 26 CFR Section 54.4980H-5, hardwired the 9.5% amount for these safe harbors into the regulations, and until official guidance updated these regulations, the 9.5% remained stagnant. Prior to IRS Notice 2015-87, there was no official guidance indicating whether or not the safe harbor percentage would be increased. However, in Notice 2015-87, the IRS stated that the safe harbor percentages are only to be adjusted in cycle with affordability percentages. So, now we have guidance and confirmation that the 9.66% affordability percentage does, indeed, apply to the safe harbors for plan years beginning in 2016.

Looking again at ACA reporting, currently, the 2015 1094/1095 forms still reference the 9.5%; however, the instructions do note that the “9.5% in the affordability safe harbors and alternative reporting methods may be subject to change if future IRS guidance provides that the percentage is indexed in the same manner as that percentage is indexed for purposes of applying the affordability thresholds.” Assuming the IRS will update the 1094/1095 forms for 2016, the increase to 9.66% would be used here, as well, and would be a welcome change for many employers. We will keep you apprised of any further updates from the IRS on this issue.

Source: Crawford Advisors; Compensation.BLR.com | IRS issues welcome clarification on ACA safe harbors

Please contact your AssuredPartners NL Benefits Team if you have questions or need assistance with these or other compliance matters.

Information contained herein is for educational and/or informational purposes only.   The information provided may change over time as the laws and regulations change. This information is not, nor is it intended to be, legal advice and each employer or client should seek their own legal counsel for guidance regarding individual situations.    

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