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WASHINGTON—Without modification, a proposed Internal Revenue Service health care reform law affordability test could encourage some employers to drop programs intended to encourage employee participation in 401(k) plans, a benefits trade group says.
Under the Patient Protection and Affordable Care Act, starting in 2014, employers are liable for an annual $3,000-per-employee penalty for employees whose required health insurance premium contribution for single coverage exceeds 9.5% of family income and the employees are eligible for federal premium subsidies to buy coverage through state insurance exchanges.
In September, the IRS asked for public comment on a proposed safe harbor in which coverage would be considered affordable as long as the premium contribution for single coverage did not exceed 9.5% of an employee's W-2 wages.
But in a letter sent Tuesday to the IRS, the American Benefits Council said using wages, as reported in Box 1 of the W-2 wage and income statement, to determine if the required premium contribution is affordable “seems to create a possible disincentive for employers regarding programs and features designed to increase employee participation” in 401(k) plans.
That's because Box 1 wages are reduced by the amount of an employee's pretax contributions to a 401(k) plan, the Washington-based ABC said in its letter.
“Thus, for example, someone who defers amounts into a 401(k) plan will have lower wages reported in Box 1 of the Form W-2 and, as a result, his or her employer-provided coverage…is more likely to be unaffordable when compared to another employee that makes fewer or no elective deferrals,” ABC said in its letter.
Given the increased likelihood of failing the affordability test and being hit with stiff financial penalties, employers might pull back on programs, like automatic enrollment, that lead to increased employee participation in 401(k) plans, the group added.
A simple remedy to the problem, ABC suggested to Treasury Department regulators, would be—for the purpose of satisfying the W-2 health care premium affordability test—to allow employers to count employees' pretax benefit plan contributions as wages.