The IRS has released final regulations on how the new health care law defines “affordable” coverage.    Generally speaking, workers must have access to affordable health care from their employers, or the employer faces a penalty.   The IRS regulations now make clear that the government will deem a plan affordable so long as the individual worker’s premium is not more than 9.5% of the worker’s household income.    The government will not measure affordability against family coverage.

This is an important clarification and gives employers a powerful incentive to make individual coverage very inexpensive, and shifts costs to family coverage.   Of course, as some health care advocates have noted, this defeats the entire purpose of the health care law because these same families cannot afford costly health insurance from their employers and will be ineligible for tax credits and other subsidies to help off-set premiums since those benefits are only available to workers whose employer provided insurance is not “affordable.”  The IRS listened to those concerns through the rule-making process, but still decided that “affordability” would be based on individual coverage.  (For a good background piece on this issue, check out this NY Times story from last August).

As for how an employer should determine “household income,” the IRS has adopted a safe harbor that allows an employer to look at the employee’s W-2 wages and compare 9.5% of the W-2 amount to the employee’s contribution to health care for that year.   This safe harbor will be available through 2014.

The new health care law forces many employers to make practical decisions about what type of coverage, if any, to offer employees (because, for some employers, dropping coverage entirely and paying the associated penalty of $3,000 might make more financial sense).   The new IRS regulations confirm that in designing benefits packages, employers should focus on making individual coverage inexpensive, not necessarily family coverage.