The IRS announced that employer-sponsored health coverage will satisfy the Affordable Care Act (ACA) affordability requirement next year if the lowest-cost, self-only coverage option an employer offers does not exceed 9.61 percent of an employee’s income. The threshold in 2021 was 9.83 percent. It had risen from 9.78 percent in 2020.
The IRS annually adjusts the affordability threshold by considering the ratio of premium growth to income growth in the preceding calendar year. Because premiums for employer-sponsored health coverage increased at a lower rate than national income growth during 2021, due largely to a drop-off in the use of non-emergency health care services as cases of COVID-19 surged, the 2022 affordability percentage dropped below the 2021 level.
The agency announced the 2022 affordability threshold—also known as the shared-responsibility affordability percentage or cost-sharing limit—on Aug. 30 in Revenue Procedure 2021-36.
Employers offering a health plan option in 2022 that costs employees no more than $103.14 per month for employee-only coverage will automatically meet the ACA affordability standard under the 2022 federal poverty line (FPL) affordability safe harbor, benefits advisors point out.
For 2021 plans using the FPL safe harbor to determine affordability, an employee’s maximum monthly premium payment could not exceed $104.53 per month.
A slight drop occurred in the safe-harbor dollar maximum for employee-paid premiums.
“This will mark the first time that the FPL safe-harbor dollar amount has decreased for calendar-year plans,” wrote Dorian Smith, a partner at HR consultancy Mercer in New York City, and Cheryl Hughes, a principal in the firm’s Washington, D.C., office. “As a result, employers that use this safe harbor will need to reduce the employee contribution for the lowest-cost, self-only option for the 2022 plan year.”
Noncalendar-year plans will continue to use the 9.83 percent affordability threshold to determine affordability in 2022 until their new plan year starts, Smith and Hughes explained. In addition, “noncalendar-year plans won’t be able to calculate the FPL safe harbor contribution limit for plan years beginning after Jan. 1, 2022, until the Department of Health and Human Services issues the 2022 FPL guidelines in January or February 2022.”
The affordability threshold is a key element of the ACA employer mandate—also called the shared-responsibility requirement or the pay-or-play rules—and applies to applicable large employers (ALEs). In general, an employer is an ALE if it (along with any members in its control group) employed an average of at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year.
Affordability Safe Harbors
Under the ACA, the affordability threshold is the highest percentage of household income an employee can be required to pay for monthly health insurance plan premiums, based on the least expensive employer-sponsored plan offered that meets the ACA’s minimum essential coverage requirements.
Because employers don’t know their employees’ household incomes, there are three affordability safe harbors ALEs can use to determine if the annual affordability threshold is being met. The safe harbors are based on information the employer has for each employee, and any of the following can be used:
- Employees’ W-2 wages, as reported in Box 1, generally as of the first day of the plan year.
- Employees’ rate of pay, which is the hourly wage rate multiplied by 130 hours per month as of the first day of the plan year or, for salaried employees, 9.83 percent of the monthly salary as of the first day of the coverage period.
- The individual federal poverty level, as published by the Department of Health and Human Services near the start of the new year. Using the FPL safe harbor simplifies ACA reporting and coding of Form 1095-C, which plan sponsors file with the IRS for each employee who is offered ACA-compliant health coverage.
“Employers should always use the federal poverty line affordability safe harbor where available” because it results in coverage automatically being deemed affordable with no per-employee calculations necessary, wrote Brian Gilmore, lead benefits counsel at Newfront, an insurance and financial services firm in San Francisco.
Employers that do not offer a medical plan option meeting the 2022 FPL affordability safe harbor, Gilmore advised, should instead use the rate of pay affordability safe harbor, which “requires a straightforward analysis of the lowest hourly rate of pay for hourly full-time employees and the lowest monthly salary for salaried full-time employees.”
The Form W-2 affordability safe harbor “provides little predictability because employees’ Box 1 wages are unknown until January of the following year,” Gilmore noted.