December 13, Request for Comments on Health Coverage Affordability Safe Harbor for Employers (Section 4980H)

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1 December 13, 2011 Submitted Electronically: CC:PA:LPD:PR (Notice ) Room 5203 Internal Revenue Service P.O. Box 7604 Ben Franklin Station Washington, DC RE: Request for Comments on Health Coverage Affordability Safe Harbor for Employers (Section 4980H) To Whom It May Concern: The U.S. Chamber of Commerce (the Chamber ) submits these comments in response to Notice ( Notice or RFC ) which was published by the Internal Revenue Service ( IRS ) in the Internal Revenue Bulletin on October 3, This Notice invites public comment to continue the process of developing regulatory guidance on the shared employer responsibility provisions in Internal Revenue Code Section 4980H 2 which was added by Patient Protection and Affordable Care Act Section and amended by the Health Care and Education Reconciliation Act of (collectively referred to as PPACA or the Law ). The Notice requests comments on a proposed safe harbor, which could be incorporated in future proposed regulations, for determining the affordability of coverage under an eligible employer sponsored plan for purposes of an employer s potential assessable payment under Code Section 4980H. The Chamber is the world s largest business federation, representing the interests of more than three million businesses and organizations of every size, sector and region, with substantial membership in all 50 states. More than 96 percent of the Chamber s members are small businesses with 100 or fewer employees, 70 percent of which have 10 or fewer employees. Yet, 1 Internal Revenue Bulletin, Bulletin No , October 3, 2011, Part III. Administrative, Procedural, and Miscellaneous, Notice , [hereinafter Notice or RFC] (available at: 2 All references to the Code are to the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder. 3 Patient Protection and Affordable Care Act, Pub. L. No , 1513, 124 Stat. 119 (2010). (by amending Chapter 43 of the Code by adding 4980H). 4 Health Care and Education Reconciliation Act of 2010, Pub. L. No , 1003, 124 Stat (2010). 1

2 virtually all of the nation s largest companies are also active members. Therefore, we are particularly cognizant of the problems of smaller businesses, as well as issues facing the business community at large. Besides representing a cross-section of the American business community in terms of number of employees, the Chamber represents a wide management spectrum by type of business and location. Each major classification of American business -- manufacturing, retailing, services, construction, wholesaling, and finance is represented. Also, the Chamber has substantial membership in all 50 states. These comments have been developed with the input of member companies with an interest in improving the health care system. OVERVIEW The Chamber and our member companies want quality health care to be readily available at an affordable price, a central goal of PPACA. The Chamber has long advocated for transparency of price, quality and cost information. The Chamber welcomes the Notice and commends the IRS for its efforts to address the challenges that employers will face in attempting to comply with the Law. Regulations implementing the employer-shared responsibility provisions will be one of the most critical components of health care reform for the employer community. We applaud the IRS for taking such a watchful, solicitous and collegial approach and for listening to the concerns that the employer community has raised regarding the challenges that employers will have in trying to assess affordability of coverage for an employee based on his/her household income. We appreciate the opportunity to comment at such an early stage of the rulemaking process. We are encouraged by the IRS s stated interest in provid[ing] employers a more workable option for determining the affordability of [the] health coverage 5 they offer to their employees. We commend the IRS for appreciating the practical difficulties [that employers will face] in assessing whether the coverage they are offering is affordable to certain employees 6 based on the PPACA s household income standard. PPACA s proponents promised the American people that its reforms would build on the current employer based system. The Internal Revenue Service suggests in this employer-shared responsibility notice an earnest desire to do so. 7 GENERAL RECOMMENDATIONS Given the overlap between the employer responsibility, the premium tax credit, the individual mandate and the exchanges, we appreciate the challenges that the IRS and the other agencies face in providing guidance and soliciting feedback during the regulatory process. Therefore, we reiterate here that the Notice is correct in restating a critical fact: according to the Law, 5 Notice, at Notice, at By allowing employers to base their affordability calculations on each employee s W-2 wages (which employers know) instead of each employee s household income (which employers generally would not know), the safe harbor would provide a more workable and practical method for measuring the affordability of an employer s coverage for 4980H(b) purposes. Notice, at

3 affordability is based on the cost of self-only coverage. While the safe harbor discussed in the Notice, permitting employers to base affordability on employees W-2 wages (which employers know) instead of on employees household income (which employers generally would not know) will work for many employers, it will not work for all of them. The proposed W-2 safe harbor rule should work reasonably well for employees who have no other sources of household income, but it may seriously understate household income for most other employees. The Chamber recommends the IRS consider alternatives for those employers for whom the safe harbor remains problematic. Affordability must be based on self-only coverage As the Notice restates, the law requires employers to offer full-time employees affordable coverage based on the cost of self-only coverage. Specifically, under the statutory provisions for tax credit eligibility, the law states that an employer-sponsored plan will be deemed to be unaffordable if the employee s share of the premium for self-only coverage exceeds 9.5% of the employee s household modified adjusted gross income. As mentioned in previous comment letters and meetings, the Chamber agrees that the law requires that affordability 8 be assessed based on the cost of self-only coverage. Under 1401, the new Code section 36B(c)(2)(C)(i)(II), the language refers to the employee s required contribution (within the meaning of section 5000A(e)(1)(B)). Under 1501, the new Code Section 5000A details the individual mandate rules. Under the new Code Section 5000A(e)(1)(B)(i), required contribution for purposes of an employer-sponsored plan is defined as the portion of the annual premium which would be paid by the individual for selfonly coverage. 9 In addition to reiterating that the Notice is correct in confirming that affordability is based on self-only coverage, we also believe that the safe harbor offers appropriate symmetry in policy. In addition to making the law more practical and workable for employers, it seems appropriate that since affordability is assessed based on the cost of self-only coverage, the cost for an individual employee s coverage should be measured against that single individual s wages. Helpful for some employers but not for those with low-wage workers The Chamber appreciates the efforts of the IRS to address the concerns employers have voiced with the difficulty in complying with the affordability test based on household income. For many, this safe harbor will provide a more workable alternative. However, for those employers for whom affordability is likely to be most challenging, the safe harbor provides a lower reprieve on which they simply will not be able to afford to rely. Many of our members are in the retail and hospitality industry and for these members, affordability of coverage for their workforce is a 8 Patient Protection and Affordable Care Act 1401(a) which amends the Internal Revenue Code of 1986 by adding Section 36B (c)(2)(c)(i), as revised by Section 1001(a)(2)(A) by the Health Care and Education Reconciliation Act of Patient Protection and Affordable Care Act 1501 (b) which amends the Internal Revenue Code of 1986 by adding Chapter 48 and Section 5000A. 3

4 tremendous concern. To provide a reprieve based on one worker s W-2, when the statute refers to household income, effectively lowers the threshold for this vulnerable business sector. To redress this problem, we suggest that an when an employee becomes eligible for employer sponsored coverage, an employer be permitted to ask that employee s household income in order to properly assess the affordability of the coverage for that employee. While we appreciate that there will likely be some sensitivity in permitting employers to obtain this information, we would recommend that employers be allowed to do so in order to comply with the statutory requirements regarding affordability. Another possible option would be to permit employers to require employees as a condition of enrollment to document that self-only coverage is unaffordable based on household income and to permit employers to consider adjusting the employer s contribution amount. SPECIFIC RECOMMENDATIONS There are a few specific, operational elements to the proposed safe harbor that raise some concerns. First, although we appreciate the concept of relying on an individual employee s wages based on the W-2, the specific box suggested is inappropriate. Secondly, we ask the IRS to clarify the timing; which year s W-2 wage information and what year s self-only premium should the employer base the affordability safe harbor calculation. We ask the IRS to consider deeming coverage affordable in certain scenarious and to permit employers to use multiple approaches based on employee class. Finally, we urge the IRS to minimize the burden for an employer to invoke the safe harbor. Improper W-2 Box The Notice proposed to permit employers to rely on an individual employee s wages in determining affordability as reported on the W-2. However, the Notice defines the employee s wages incorrectly as the total amount of wages as defined in 3401 (a). which is the amount required to be reported in Box 1 of Form W-2. Wage and Tax Statement (W-2 wages). 10 The dollar amount reported in Box 1 includes wages reduced by contributions and other elective pretax benefits. To appropriately base affordability on an employee s wages, we urge the IRS to use a different box that more accurately reflects the compensation paid to the employee. The employee s wages should be defined by adding back in the contributions made for certain benefits under cafeteria plans, elective deferrals or qualified transportation fringe benefits. This calculation is made frequently by employers when determining wages for purposes of 401(k) or pension plans. The proposed safe harbor will produce unfair results if employers rely on Box 1. For example, for two employees whose contributions would be based on Box 1, if one employee makes the maximum 401(k) contribution each year and the other one does not contribute, the employee that contributes to the 401(k) would get a higher contribution rate from the employer. What s more the iterative calculations needed to determine the cap will be somewhat hard to explain to employees who buy health coverage with pre-tax contributions. 10 Notice, at

5 While an employer could adopt a cap of Box 1 income minus the maximum amount an employee could contribute to 401(k) plans or salary reduction cafeteria plans, that would replace unfairness to employees with unfairness to employers, and it would discourage them from making 401(k) and salary reduction cafeteria plans available. A reasonable compromise would be to a safe harbor of Box I income determined by adding back all 401(k) and salary reduction cafeteria plan contributions and reducing the result by the cost of employee-only coverage (determined without regard to any safe harbor cap) and the average percentage of pay non-highly paid employees contributed during a lookback year as 401(k) plan or salary reduction cafeteria plan contributions other than for group health insurance. Timing:Which wages for which plan year? The Chamber recommends that the IRS permit allow employers to assess affordability based on look back period wages, e.g., for the preceding calendar year or shorter period. The look back period would need to end up to 2-3 months before the contribution period begins to permit employers time to calculate affordability. For example, if an employer is calculating affordability for an employee for plan year beginning January 1, 2014, coverage should be deemed affordable if the cost does not exceed 9.5% of the employee s 2013 W-2 wage amount or his or her W-2 wages for e.g., January through October. For employee who did not work throughout the lookback period, the employer should be permitted to normalize (e.g., annualize) compensation to reasonably reflect the amount the employee would have earned had he or she worked throughout the lookback period. Employee Certification Alternative Yet another safe harbor approach would be to deem coverage affordable if the employer offered to cap contributions based on household income for any employee who claims household income of less than 400% of the federal poverty level and provides reasonable proof of that income, e.g., proof for the prior calendar year. Under this approach, an employer would be deemed to be providing affordable coverage if it applies this cap for 12 months after determining that the employee has provided adequate proof. Multiple Approaches Should Be Permitted If the IRS authorizes more than one safe harbor method, an employer should be able to use different methods for different classes of employees, rather than being required to use the same method of all employees. Establishing Compliance An employer that adopts a safe harbor method should be deemed to be providing affordable coverage to employees covered by the safe harbor if the employer certifies that is has adopted a safe harbor method with respect to them, that it has in good faith and substantially correctly implemented the safe harbor, and that it has corrected and will correct any safe harbor errors it 5

6 makes. The IRS would normally accept certification as compliance, but could, of course, audit employers to verify that their certifications are true. CONCLUSION We appreciate the opportunity to comment on the Notice and are available to discuss any of our comments informally, or by way of testimony in hearings or otherwise. We urge the IRS to continue to work carefully, pragmatically and cooperatively with the numerous stakeholders and we look forward to continuing to work together in the future. Sincerely, Randel K. Johnson Senior Vice President Labor, Immigration, & Employee Benefits U.S. Chamber of Commerce Katie Mahoney Executive Director Health Policy U.S. Chamber of Commerce 6