Ruling clarifies health coverage

01/01/2013 12:00 AM

01/01/2013 1:24 PM

WASHINGTON – In a long-awaited interpretation of the new health care law, the Obama administration said Monday that employers must offer health insurance to employees and their children, but will not be subject to any penalties if family coverage is unaffordable to workers.

The requirement for employers to provide health benefits to employees is a cornerstone of the new law, but the new rules proposed by the Internal Revenue Service said that employers' obligation was to provide affordable insurance to cover their full-time employees, and offers no guarantee of affordable insurance for a worker's children or spouse.

To avoid a possible tax penalty, the government said, employers with 50 or more full-time employees must offer affordable coverage to those employees. But, it said, the meaning of "affordable" depends entirely on the cost of individual coverage for the employee, what the worker would pay for "self-only coverage."

The new rules, to be published in the Federal Registry, create a strong incentive for employers to put money into insurance for their employees rather than dependents. It is unclear whether the spouse and children of an employee will be able to obtain federal subsidies to help them buy coverage – separate from the employee – through insurance exchanges being established in every state. The administration explicitly reserved judgment on that question, which could affect millions of people in families with low and moderate incomes.

Many employers provide family coverage to full-time employees, but many do not. Family coverage is much more expensive, and the employee's share of the premium is typically much larger.

In 2012, according to an annual survey by the Kaiser Family Foundation, premiums for employer-sponsored health insurance averaged $5,615 a year for single coverage and $15,745 for family coverage. The employee's share of the premium averaged $951 for individual coverage and more than four times as much, $4,316, for family coverage.

Starting in 2014, most Americans will be required to have health insurance. Low- and middle-income people can get tax credits to help pay their premiums, unless they have access to affordable coverage from an employer.

In its proposal, the IRS said, "Coverage for an employee under an employer-sponsored plan is affordable if the employee's required contribution for self-only coverage does not exceed 9.5 percent of the employee's household income."

The rules, though labeled a proposal, are more significant than most proposed regulations. The IRS said employers could rely on them in making plans for 2014.

The law says an employer with 50 or more full-time employees may be subject to a tax penalty if it fails to offer coverage to "its full-time employees (and their dependents)." Employers asked for guidance, and the Obama administration provided it, saying that a dependent is an employee's child younger than 26.

"Dependent does not include the spouse of an employee," the proposed rules say.

Thus, employers must offer coverage to children of an employee, but do not have to make it affordable. And they do not have to offer coverage at all to the spouse of an employee.

The administration said that the rules – which apply to private businesses, nonprofit organizations and state and local government agencies – would require changes at many work sites.

"A number of employers currently offer coverage only to their employees, and not to dependents," the IRS said. "For these employers, expanding their health plans to add dependent coverage will require substantial revisions to their plans."

In view of this challenge, the agency said it would grant a one-time reprieve to employers who fail to offer coverage to dependents of full-time employees, provided they take steps in 2014 to come into compliance.

Under the rules, employers must offer coverage to employees in 2014 and must offer coverage to dependents as well, starting in 2015.

The new rules apply to employers that have at least 50 full-time employees or an equivalent combination of full-time and part-time employees.

A full-time employee is a person employed on average at least 30 hours a week. And 100 half-time employees are considered equivalent to 50 full-time employees.

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