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April 29, 2020 | Covid-19 | Posted by Bob Greene, Senior HR Industry Analyst at Ascentis

When Affordable Care Act Affordability Testing and Covid-19 Legislation Collide

Virtually every HR professional has been devoting every waking moment for the past eight weeks or more to their organization’s response to the unprecedented Coronavirus pandemic in America and around the world. For this reason, they can certainly be forgiven for having put thoughts of ACA compliance aside for a while. And when it comes to the “intersection” between ACA and the two most recent pieces of mega-legislation with which we are all trying to comply (FFCRA and CARES Act), the only issues that jump out for most HR professionals are:

  1. Ensuring that healthcare benefits continue uninterrupted for employees impacted by the crisis, who remain employed, and take leave under either EPSL (Emergency Paid Sick Leave) or HEPL (Health Emergency Paid Leave, aka Emergency Family/Medical Leave Extension), and
  2. Aggregating the various allowable premiums, for allowable plan types, that collectively represent the “cost of health care” which can be used by employers for a variety of purposes under the new legislation: (i.) be included in tax credits for the cost of providing EPSL and HEPL to qualifying employees, (ii.) be added to the computation of base payroll costs for determining a Paycheck Protection Program principle loan amount, and (iii.) be included in forgiveness amounts being claimed at the conclusion of the 8-week measuring period for PPP loan forgiveness.

Reviewing ACA Affordability: BRIEFLY!

As we all remember, the Affordable Care Act includes a detailed and arcane set of regulations for employers to prove affordability of their plans, with the point being to try to compare the lowest cost plan single premium to the employee’s “household income” – a term that Congress improvidently used, once again making assumptions that employers had employee information in their databases that they, in fact, did not have and could not legally obtain.

As part of those regulations, the ACA offers employers three different safe harbors that, if met, are considered to prove affordability:

  1. Federal Poverty Level
  2. Monthly Rate of Pay
  3. W-2 Box 1 Gross Pay

For more information about the “mechanics” of these safe harbors, see Q&A 39 in the latest update by the IRS on this subject.

The monthly rate of pay safe harbor was always somewhat limited. It cannot be used for employees who are tippable. It also cannot be used for employees who are paid solely on the basis of commissions, and it tends to under-calculate the affordable premium allowed for hourly employees because it uses 130 hours per month as a constant for monthly pay, regardless of the number of hours worked.

But a bit of little-remembered “fine print” for the monthly rate of pay safe harbor is this: the monthly rate of pay is always measured on the first day of the PLAN year. For hourly employees, the safe harbor may be recalculated if the hourly rate is decreased during the remainder of the plan year (but not if it is increased.) But for salaried employees, if the employee’s monthly salary is decreased, the employer may no longer use the monthly rate of pay safe harbor for that employee for the rest of the plan year – they must switch to, and use, one of the other two available safe harbor methods.

The ESRP Trap: the IRS Computers Never Forget!

Recall that Employer Shared Responsibility Payments are assessed when an employer violates either § 4980H(a) or § 4980H(b) of the ACA. The “HA” penalty – sometimes referred to as “pay rather than play” applies when an employer chooses not to offer ACA-compliant health insurance at all.

But it’s the so-called “HB” penalty that has the potential to have problematic interactions with the steps employers are taking now to address their Coronavirus problems, because that provision applies where an employer does offer their employees coverage, but in the case of one or more of those employees, for one or more months of the year, the employer’s offered coverage fails the affordability test (or minimum value or minimum essential coverage, which are unlikely to apply in this situation.)

Let’s Look at an Example Scenario

Employer Acme Manufacturing has been hard hit by the Pandemic and as a result faced the prospect of either shutting its doors or making some significant cuts in staff. They decide to lay off 20% of their employees, and offer another 10% of staff their choice of either a 25% cut in pay for a period, or furlough. About 30 workers accepted the temporary cut in pay, including both hourly and salaried basis employees.

Acme had been using the monthly rate of pay affordability safe harbor for years, because (a.) they had separate HR and Payroll systems which made the W-2 safe harbor difficult to administer, and (b.) their lowest single option employee premium per month would have exceeded the maximum allowed using the Federal Poverty Level safe harbor.

When their salaries were cut by 25%, some of the salaried employees had monthly rates of pay that failed the affordability test for 2020. Their 1095-c run in early 2021 (for reporting year 2020) reflected a “1E” (rather than the expected “1A” code) in Line 14, and a monthly premium cost in Line 15 (rather than the expected blank value).

Unfortunately, the Pandemic stretches longer than Acme can handle, and some of these same employees who took pay cuts are laid off a few months later. If at least one of these employees (whether active or laid off) goes to their state’s, or the federal, health insurance exchange, and receives subsidized coverage (because their household income is less than 400% of the federal poverty level for applicable family size), sooner or later the “big IRS matching program in the sky” will match up related 1095-a and 1095-c forms and possibly assess a penalty of $321.67 per month. And that assessment will be made for ALL employees who failed to receive affordable coverage and received a subsidy (premium tax credit) – not just the one who sparked the matching inquiry.


Finally, bear in mind that these penalty assessments, via the ever-unpopular IRS 226-J Letter, will not be immediate. Affordability errors occurring in 2020 won’t even be reported on the 1095-c until March 31, 2021 (unless extended) and the IRS statute of limitations on this reporting is three years from due date or filing date – whichever is later. So proposed ESRP assessments for the 2020 reporting year could come as late as March, 2024. And given that the federal government incurred $2.8 trillion in new deficit spending over the last five weeks (likely with more to come), it’s unlikely we’ll see waivers on any aspects of employer penalties in the near future.

Bob Greene currently serves as Senior HR Industry Analyst at Ascentis. Bob’s 40 years in the human capital management industry have been spent in practitioner, consultant and vendor/partner roles. As practitioner, he managed payroll for a 5,000-person bank in New Jersey. As consultant, he spent 8 years advising customers in HRMS, and payroll and benefits system design as well as acquisition strategies. Bob also built a strategic HCM advisory practice for Xcelicor (later acquired by Deloitte Consulting.)