Affordable Coverage?

[Chaz]

An employer has an unusual plan design. Most employees pay a portion of the cost of coverage on a pre-tax basis through a cafeteria plan. Other employees (don't ask why) instead pay the full cost of coverage (apparently by writing a check or checks to the employer) and then receive additional (taxable) compensation in their pay so that they effectively pay the same percentage of the premium for the coverage.

Does the employer calculate whether the coverage is affordable for this second group of employees by using the full cost of coverage or can it include the additional compensation so that it "nets out"?

Thanks for your help.

[Bill Presson]

I can't comprehend why the employer would do it that way. But I don't believe you can offset the cost by the additional compensation. The regs don't even allow you to take into account that cafeteria premiums are pre tax.

They need to take a look at what they're doing and why and revamp it for 2016, IMHO.

[leevena]

Sorry, I too am a little confused. Trying to understand exactly what is occuring with the second group. But regardless, the test for affordability will be if the employee cost exceeds 9.5% of the income used to calculate. The additional compensation provided by the employer will increase the income used for calculation.

By way of an example, the coverage gross cost is $500 per month/$6000 per year, the employee comp is $30,000. Employee writes a check for $500 per month/$6000 per year and the employer increase the comp by $500 per month, to a total of $36,000 per year. If this is what you are describing? If so the test would be if the $500 per month/$6000 per year paid is 9.5% or below. At $36,000 per year the 9.5% threshold would be $3,420.

[Chaz]

Here's a mathematical example:

Assume two employees from each group's gross base salary = $50,000. Premiums for self-only coverage are $1,000 per month ($12,000 per year).

Employee A is in the first group and pays 50% ($6,000 per year) of the premiums through a cafeteria plan (the employer contributes the rest). Employee A's W-2 states his income is $44,000 ($50,000-$6,000). Using the W-2 method for determining affordability, employee A's percentage = 13.63% ($6,000/$44,000).

Employee B is in the second group and pays 100% ($12,000 per year) of the premiums to the employer via check and then receives additional compensation of $6,000 representing 50% of the cost of coverage. Employee B's W-2 states his income is $56,000 ($50,000+$6,000). Using the W-2 method, employee B's percentage = 21.42% ($12,000/$56,000).

There would in fact be a difference (using the actual numbers results in Employee A being below the 9.5% threshold and Employee B being above), unless I am missing something.

[Chaz]

Anyone have any thoughts on this?

[GBurns]

I think that this employer's issues with their employee benefits plan, group health plan and the cafeteria plan are much bigger than the issues of affordability. It is quite possible that the whole cafeteria plan could be disqualified/disallowed because of this "outside the plan" arrangement. There are also possible participation and discrimination issues on which, I hope that someone who does plan testing will opine, it being that there is probably no reasonable clasification which could apply to these other employees.

If either of the plans are disqualified or disallowed, then there would be no valid "offer of coverage" and no issue of "affordability".

Then there is the question of this arrangement being an "Employer Payment Plan".