Employee Required Contribution: What It Means for Health Coverage
Explore how employee contributions impact health coverage affordability, calculation methods, and reporting requirements for comprehensive understanding.
Understanding employee required contributions for health coverage is essential for both employers and employees. These contributions directly affect the affordability of healthcare plans, shaping decisions about plan selection and the financial burden employees may face.
Determining Affordability Thresholds
The affordability threshold is critical in determining whether an employer-sponsored health plan complies with the Affordable Care Act (ACA). For 2024, the IRS has set this threshold at 9.86% of an employee’s household income for self-only coverage. Employers must ensure their plans meet this standard to avoid penalties, which can amount to $4,320 per employee if an employee receives a premium tax credit through the Health Insurance Marketplace due to an unaffordable plan.
Employers can use one of three safe harbors—W-2 wages, rate of pay, or the federal poverty line—to calculate the maximum permissible employee contribution. For example, the W-2 wages safe harbor bases the calculation on the employee’s total wages as reported in Box 1 of their W-2 form. Regularly reviewing health plan offerings and affordability compliance is essential for avoiding penalties and maintaining ACA compliance.
Calculating Required Contributions for Various Coverage Levels
Understanding required contributions for different coverage levels—self-only, dependent, or family coverage—is vital, as these contributions vary depending on the type of coverage selected.
Self-Only Plans
For self-only plans, the ACA requires that employee contributions not exceed 9.86% of their household income in 2024. Employers often rely on the W-2 wages safe harbor to calculate this amount. For instance, an employee earning $50,000 annually should contribute no more than $4,930 for self-only coverage. Accurate calculations are necessary to avoid penalties under IRC Section 4980H.
Dependent Coverage
Dependent coverage introduces additional complexity. While the affordability threshold applies specifically to self-only coverage, employers should also consider the total cost borne by employees, including premiums and out-of-pocket expenses. Tiered contribution structures, where employee premiums increase with the number of dependents covered, can help distribute costs more equitably between employers and employees.
Family Coverage
Family coverage requires careful cost assessments, as it encompasses a broader range of expenses. Employers should evaluate not only premiums but also deductibles and out-of-pocket maximums. Subsidizing part of the family coverage cost can enhance benefits offerings, though employers must balance this against their overall benefits budget. Strategies like negotiating with insurers or implementing wellness programs can help manage these costs effectively.
Reporting Requirements on Form 1095-C
Complying with Form 1095-C reporting requirements is essential for ACA compliance. Applicable Large Employers (ALEs)—defined as those with 50 or more full-time equivalent employees—must accurately complete the form, detailing the health insurance coverage offered to employees. This includes employee names, social security numbers, and the months they were offered coverage.
Form 1095-C must be distributed to employees by January 31, 2025, and filed with the IRS by February 28, 2025, for paper filers or March 31, 2025, for electronic filers. Noncompliance can result in penalties under IRC Sections 6721 and 6722.
Adjustments for Mid-Year Changes
Mid-year changes in health coverage require flexibility and careful planning. These changes can result from employee life events, regulatory updates, or shifts in business operations. Qualifying life events, such as marriage, the birth of a child, or a change in employment status, often necessitate adjustments to contributions and coverage to remain compliant with regulations.
Regulatory updates, such as changes to the affordability percentage or IRS guidelines, may also require mid-year revisions. Employers must stay informed and act promptly to integrate these changes into their health coverage plans to ensure continued compliance.