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Under the Affordable Care Act, if a company with 50 employees hopes to avoid the penalty in the so-called employer mandate, it is not enough to merely offer those workers health insurance. The insurance must be “affordable,” among other things, and the law is very specific about what affordable means: It means the employee’s share of the premium cannot exceed 9.5 percent of the employee’s household income.

If this seems straightforward, putting it into action has been anything but. Household income is the benchmark because the Affordable Care Act ties affordability to the tax credits and subsidies available to help individuals purchase insurance in the new marketplaces created by the law. In fact, the penalty for employers who offer unaffordable insurance comes into play only when employees use these subsidies to buy their own insurance rather than accept the company’s coverage.

But employers, of course, are in no position to know what their employees’ household income might be, least of all as determined by the esoteric definition of household income used by the Internal Revenue Service. Among other things, determining household income would force employers to find out how much their employees’ spouses make and even to track down certain private household expenses, like alimony payments.

So the I.R.S., which is writing the regulations for the mandate, has proposed three alternatives to determining household income, safe harbors that would permit employers to comply with the mandate and avoid the penalty. First, a company could use the wages it reports to the I.R.S. on Form W-2 as a substitute for household income. So long as the employee’s share of the insurance premiums is no more than 9.5 percent of the wages reported in Box 1 of the form (meaning the amount excludes deferrals such as 401k or flexible spending account contributions), the coverage would be deemed affordable. (Again, this is for companies with more than 50 employees; smaller companies are under no obligation to provide health insurance.)

Or the company could calculate a baseline monthly wage based on the first month’s hourly rate or salary. Unlike the W-2 option, the wage calculated here would not exclude deferrals, so it would likely be higher. However, if the company reduced the employee’s hourly rate or salary over the year, it would not be able to use this option. And that eliminates this option for many companies, because they generally cannot plan for wage cuts, said Seth Perretta, an attorney from the Washington firm Crowell & Moring, who is representing several trade groups in the rule making.

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Posted 5:56 PM

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