The IRS recently announced the ACA affordability threshold for 2021 at 9.83%, a small increase from the 2020 level of 9.78%.
In order to avoid triggering a penalty under Section 4980H(b) of the Internal Revenue Code (the “Code”), an applicable large employer must offer full-time employees health plan coverage that provides minimum value and is affordable. The affordability test is based on the cost of employee-only coverage for the lowest cost medical plan option. An employee is deemed to have received an offer of affordable coverage even if he/she enrolls in a higher cost option.
The test is based on whether the employee contribution for the lowest cost medical plan option exceeds 9.83% of household income. As employers do not know an employee’s household income, for purpose of Code Section 4980H(b) an employer is permitted to set its contribution rate using one of three safe harbors, where the employee contribution for single coverage does not exceed:
- Federal Poverty Level Safe Harbor. 83% of the federal poverty level for a single individual. For a calendar year plan, the monthly contribution for 2021 should not exceed $104.53 ($12,760 x 9.83%/12).
- Form W-2 Safe Harbor. 83% of the individual’s Form W-2 wages (as shown in Box 1) for that year; or
- Rate of Pay Safe Harbor. 83% of the individual’s rate of pay. For an hourly employee, the threshold is calculated as 9.83% x 130 hours x the rate of pay in effect as of the first day of the plan year, or the lowest rate of pay during the calendar month. For a salaried employee, the threshold is calculated as 9.83% x the monthly salary in effect as of the first day of the plan year; if the monthly salary is reduced, the rate of pay safe harbor may not be used.
An employer can use a different safe harbor for any reasonable classification of employees (i.e., salaried/hourly) and can use a different safe harbor for each year.
As an employer begins to focus on 2021 medical plan design, it should make sure that at least one medical plan option satisfies an affordability safe harbor. We also recommend that an employer document which safe harbor it is using and retain all documentation necessary to substantiate how the affordability test is met for each plan year.