Every year the Internal Revenue Service (IRS) adjusts the shared-responsibility affordability percentages under the Affordable Care Act (ACA), and recently issued the new 2021 percentage in Rev. Proc. 2020-36. For 2021, the premium cost of the lowest-level self-only coverage must be less than 9.83% of an employee’s household income to be considered affordable. This is an increase from the 2019 affordability percentage of 9.78%. The ACA originally set the affordability threshold at 9.5% of an employee’s household income.
For many employers, it is difficult to determine an employee’s household income. Accordingly, the IRS provided three safe harbors for employers to determine if they have offered affordable coverage. An employer may choose any safe harbor but must apply the safe harbor on a reasonable and consistent basis.
Briefly, the three safe harbors are:
Rate of Pay Safe Harbor: Under this safe harbor, an employer’s offer of coverage will be deemed affordable if the cost for the lowest-level self-only coverage is no more than the IRS issued affordability percentage (9.78% for 2020 or 9.83% for 2021) of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay during the calendar month (or the start of the plan year).
Form W-2 Safe Harbor: Under this safe harbor, an employer’s offer of coverage will be deemed affordable if the employer’s share of the cost for the lowest-level self-only coverage is no more than the IRS issued affordability percentage (9.78% for 2020 or 9.83% for 2021) of the employee’s wages as reported in Box 1 of Form W-2.
Federal Poverty Line Safe Harbor: Under this safe harbor, an employer’s offer of coverage under a calendar year plan is affordable if an employee pays no more for the lowest-level self-only coverage than the IRS issued affordability percentage (9.78% for 2020 or 9.83% for 2021) of the published annual individual U.S. mainland federal poverty level divided by 12.
If the safe harbor makes the employer’s offer of coverage affordable, the employer will not face penalties, even if an individual’s overall household income qualifies him/her for a premium tax credit from Covered California.
Employers should carefully monitor the adjustments to the affordability percentage since failure to offer affordable, minimum value coverage to full-time employees may result in the employer shared responsibility penalties. The 2020 penalty for employers that do not offer affordable, minimum value coverage is $321.67 per month/$3,860 per year for each employee who enrolls in coverage through Covered California and qualifies for assistance premium tax credit. These penalty amounts have not yet been released for 2021 as of the publishing of this Newsletter.