Insight to Action

Benefits & Healthcare Update: IRS Increases Affordability Safe Harbors, Clarifies Treatment of Waiver Incentives

13 January 2016

At the end of 2015, the Internal Revenue Service (IRS) provided guidance in Notice 2015-87 with respect to Health Reimbursement Accounts (HRAs) and how to calculate the affordability of coverage. While much of the guidance restates and formalizes previous remarks from the agency, there are a couple new developments in the Notice regarding affordability that can affect the way employers set their employee contributions and structure their plans.

Affordability Safe Harbors Indexed

In the Final Rule regarding the employer mandate, the IRS established three safe harbors for providing affordable medical insurance to ACA full-time employees: the Federal Poverty Level safe harbor, the Form W-2 safe harbor, and the Rate of Pay safe harbor. Each safe harbor allows employers to set monthly employee contributions for employee-only coverage according to 9.5% of the federal poverty level, 9.5% of the employee's Form W-2 income, or 9.5% of the employees' rate of pay multiplied by 130 hours per month, respectively, and not owe a penalty under Section 4980H(b). This is regardless of whether that employee actually receives a premium subsidy payment due to the employee's own income. The Final Rule did not set the 9.5% amounts to increase year-over-year along with the corresponding increase in an individual's eligibility for premium subsidies.

Notice 2015-87 announces that the IRS intends to amend the Final Rule so that the affordability safe harbors do in fact increase along with the corresponding increase in eligibility for premium subsidies. Consequently, the affordability safe harbors will retroactively and prospectively increase annually: 9.56% for plan years beginning in 2015, and 9.66% for plan years beginning in 2016.

To qualify under the 2015 Rate of Pay safe harbor previously, monthly employee contributions for the cheapest, valuable single/employee-only coverage could be no more than 9.5% of the employee's hourly rate of pay multiplied by 130 hours. To illustrate, say that the employee was paid $12/hour: $12/hour x 130 hours x 0.095 = $148.20. Now that the safe harbor is indexed, the calculation for 2015 becomes $12/hour x 130 hours x 0.0956 = $149.13, and for 2016 it is $12/hour x 130 hours x 0.0966 = $150.69.

While far too late to actually adjust contributions for 2015, it is welcome news for employers setting their contribution strategy in the future.

Waiver Incentives and Opt-Out Credits

When considering whether contributions are affordable, employers must account for the entire economic choice facing individuals between accepting and declining an offer of coverage. This means that contributions include any sort of incentives to decline coverage, whether they are opt-out credits, waiver incentives, or any other sort of compensation made as a result of the employee choosing not to take the employer's offer of medical insurance coverage. For instance, if an employer offers $100/month cash out option or incentive to waive coverage, then this $100 is included as part of the employee contribution for purposes of determining whether the employer offers affordable medical insurance.

IRS Notice 2015-87 is available online here:

Employers should reexamine their employee contributions and strategy in light of this guidance. If you have any questions regarding Notice 2015-87 or how the employer mandate affordability provisions apply to your plan, please contact Ed Doherty at 646-839-8251 or via email at