- Posted by Jessica Waltman
- On August 17, 2020
Recent guidance from the Internal Revenue Service (IRS) sets the federal “affordability” percentage for employer-sponsored coverage at 9.83 percent of household income for 2021. The Affordable Care Act (ACA) establishes that anyone offered health coverage at work only qualifies for subsidized individual market coverage if their job-based coverage is “unaffordable.” Each year, the IRS sets a household income percentage to determine if an employee’s coverage meets this “affordability test.” All businesses that offer health insurance benefits need to have this information to inform employees and for a multitude of compliance purposes.
For 2020, the rate is 9.78 percent of household income, so 9.83 percent is a slight increase. When establishing premium contribution rates for their next plan year, companies should keep the new 2021 rate in mind.
Applicable large employers (ALEs) subject to the ACA’s employer shared responsibility provisions (employer mandate) are the most affected by the annual affordability rate percentage. For ALEs, if any full-time employee’s premium costs do not pass the “affordability test,” then the ALE has tax penalty liability. To pass, an employee’s share of the single employee premium for the lowest cost minimum value plan must be less than the year’s affordability percentage. The single employee rate is always used for the calculation, regardless of what coverage option the employee selects.
Understanding the rate upfront also helps ALEs determine which affordability safe harbor to use for employer reporting purposes. Since employers generally do not know their employees’ comprehensive household incomes, the IRS created three safe harbors for employers. Employers can either apply the affordability percentage to the federal poverty level or use employee’s hourly rate of pay or their W-2 wages and gain safe harbor protection against employer mandate liability. Companies can use different safe harbors for different classes of employees (such as hourly versus salary), provided they do so on a uniform and consistent basis for all employees in a category. ALEs must report the safe harbor(s) they select on their Forms 1094/1095 C.
The affordability calculation doesn’t just apply to ALEs. All businesses that offer health insurance to their employees should determine if their coverage meets the annual affordability standard. That way, they can share accurate information with employees interested in exchange-based individual coverage and premium tax credits. If an employee declines “affordable” coverage in favor of an exchange-based premium tax credit, then the employee could have to pay back their tax credit, with a penalty. Furthermore, many employers of all sizes are subject to the Fair Labor Standards Act. These companies need to know how the affordability rate applies to their coverage offerings when they complete the annual exchange notice that all employees must get within 14 days of hire.