Only a few months ago, there were hearings on what the future of the Affordable Care Act (“ACA”) would be and whether the legislation would be considered unconstitutional and struck down. Although the Supreme Court decision on the fate of the ACA is not expected until late June, legal scholars summarize the November 2020 oral arguments as almost certainly in favor of keeping the ACA in place. Additionally, as our country is dealing with a pandemic and the Biden administration is expanding access to affordable health insurance, we do not see ACA going anywhere.
One of the significant components of ACA legislation is that health insurance is affordable. Under the Employer Mandate, Applicable Large Employers (“ALEs”) must offer full-time employees, and their dependents, affordable minimum essential coverage that provides minimum value. Every year the IRS adjusts the affordability percentage to determine if health insurance premiums are considered affordable under ACA regulations. The affordability threshold for 2021 is 9.83%, which is a slight increase from the 2020 affordability rate of 9.78%.
Employers need to take into account the cost to their employees for health coverage when determining the health plan options. To avoid possible penalties, a company must offer single-only health insurance coverage that is below the affordability threshold. To determine whether a plan is affordable, according to ACA regulations, the IRS has established three safe harbors to calculate if the employee contribution to obtain coverage is considered affordable.
W- 2 Wages Safe Harbor – To determine if insurance cost is affordable using the W-2 calculation, multiply the employee’s gross income by the affordability rate of 9.83% and divide by 12 to obtain the monthly cost the premium should not exceed (e.g., for gross income of $32,000 a year, the calculation would be: ($32,000 x .0983)/12 = $262.13). In this scenario, if the employer offers a plan to the employee that costs less than $262.13 per month for single-only coverage, the employer meets the affordability standard.
Rate of Pay Safe Harbor –To determine if insurance cost is affordable using the hourly rate of pay calculation, multiply the employee’s hourly rate by 130 (130 is the minimum monthly hours an employee must work to be considered a full-time employee). Then multiply by the affordability rate of 9.83% (e.g., for an hourly pay rate of $15.00 an hour, the calculation would be: $15 x 130 X .0983 = $191.69). In this scenario, if the employer offers a plan to the employee that costs less than $191.69 per month for single-only coverage, the employer meets the affordability standard.
Federal Poverty Level Safe Harbor – To use the Federal Poverty Level (“FPL”) Safe Harbor to determine affordability, multiply the applicable tax year’s FPL (for TY2020, the FPL is $12,760), by the affordability rate of 9.83% and divide by 12 (e.g., ($12,760 x .0983)/12 = $104.53). In this scenario, if the employer offers a plan to the employee that costs less than $104.53 per month for single-only coverage, the employer meets the affordability standard.
It is important to use the proper safe harbor to avoid the possibility of penalties. When working with your broker to choose a health plan for your organization, you should determine the best option to measure affordability and meet the requirements of the ACA. Now more than ever, it is prudent for ALEs to utilize certified professionals and robust solutions for their ACA reporting needs. Please contact SPS/GZ at sales @greenzapto.com with any questions you may have about ACA reporting or to learn more about our tailored solutions.