As the summer starts to wind down, it’s easy slip into a “set it and forget it” mindset especially when it comes to compliance with the Affordable Care Act (ACA). Let’s face it, the ACA isn’t new. But, as many employers finalize renewal strategies and plan for 2020, it makes sense to check in on ACA compliance - especially the employer shared responsibility provisions. More specifically, employers should determine whether their offer of coverage to employees is considered affordable or not. Employers that fail to evaluate their contribution strategies could face penalties if an employee’s offer of coverage is unaffordable and that employee enrolls in marketplace coverage and receives a subsidy.
Last month, the IRS released Revenue Procedure 2020-36, announcing the ACA affordability percentage for 2021 will be 9.83% of household income. For 2021, the cost of single coverage must be less than 9.83% of an employee’s household income in order to be affordable. This is up from the 2019 affordability percentage of 9.78%, but still not back to the 2018 percentage which was 9.86%. The increase in affordability percentage means that employers may be able to increase their employee contributions in 2021 for their lowest cost self-only coverage option and still meet one of the affordability safe harbors.
As a reminder, because employee household income is generally unknown to employers, the IRS provides employers the opportunity to protect themselves from inadvertent penalty by way of three safe harbors when determining affordability:
- Federal Poverty Level: To determine affordable coverage under the Federal Poverty Level safe harbor, the employee’s contribution for the lowest-cost self-only coverage that provides minimum value cannot exceed 9.83% of the Federal Poverty Level set each calendar year by The Department of Health and Human Services (HHS). The current poverty level is $12,760 – the maximum contribution for an employer using the Federal Poverty Level safe harbor for 2021 is $104.53 (up from $101.79 in 2020).
- Rate of Pay: This test bases affordability on an employee’s rate of pay. For an hourly employee, the contribution for the lowest-cost, self-only coverage that provides minimum value cannot exceed 9.83% of the employee’s hourly rate of pay multiplied by 130 hours per month.
- Form W-2 (Box 1): Coverage is deemed affordable for 2021 if an employee’s premium contribution for the lowest-cost, self-only coverage that provides minimum value does not exceed 9.83% of the employee’s Box 1 wages on Form W-2 in the 2021 taxable year.
The IRS has not yet announced the 2021 penalty amounts, but we know the amounts are not likely to decrease. The 2020 penalty for employers that do not offer affordable, minimum value coverage is $3,860 per employee that enrolls in exchange coverage and qualifies for assistance. If you have questions about whether your coverage is affordable, please contact your HORAN representative for assistance.