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IRS Announces the Affordable Care Act’s Affordability Percentage for 2020

 July 25 2019     Diane Cross

The IRS issued Revenue Procedure 2019-29 this week announcing a decrease in the Affordable Care Act’s (ACA) affordability percentage for 2020 – 9.78% (down from 9.86% for 2019). In other words - this means that employer-sponsored group health coverage will satisfy the ACA’s affordability requirement under the employer mandate if the employee’s share of the lowest-cost, self-only coverage option does not exceed 9.78% of the employee’s household income. The affordability percentage directly impacts plan design for applicable large employers (ALEs) – specifically employee contribution strategies – as discussed below.

Background
The affordability percentage is a key component in determining whether an applicable large employer (ALE) could be subject to a penalty under the ACA’s employer mandate. The ACA’s employer mandate (Section 4980H or the pay or play rules) require ALEs to offer affordable, minimum value health coverage to at least 95% of their full-time employees (and dependents) or pay a penalty. An ALE is subject to a penalty under Section 4980H(b) if it (1) fails to offer affordable coverage; and (2) one of its employees gains coverage through the exchange and receives a premium tax credit. When the employer mandate was implemented in 2014, employer-sponsored coverage was considered affordable if the employee’s required contribution for self-only coverage did not exceed 9.5% of the employee’s household income for the tax year. Since 2014, the affordability percentage has been adjusted annually by the ratio of premium growth to income growth for the preceding calendar year, with the 2020 threshold at 9.78%. An overview of the affordability percentage for recent years includes: 

Year  Affordability Percentage 
2020 9.78%
2019 9.86% 
2018 9.56% 

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 to determine affordability:

  • Form W-2 (Box 1): Coverage is deemed affordable for 2020 if an employee’s premium contribution for the lowest-cost, self-only coverage that provides minimum value does not exceed 9.78% of the employee’s Box 1 wages on Form W-2 in the 2020 taxable year.
  • 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 9.78% of the employee’s hourly rate of pay multiplied by 130 hours per month.
  • 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 9.78% of the Federal Poverty Level set each calendar year by The Department of Health and Human Services (HHS). Because the poverty level rose last year to $12, 490 – the maximum contribution for an employer using the Federal Poverty Level safe harbor for 2020 is $101.79 (up from $99.75 in 2019).

Impact to Employers
Employers should use the new affordability threshold when planning cost-sharing strategies in 2020 to avoid risk of penalties under the ACA’s employer mandate. This updated affordability percentage is effective for plan years beginning January 1, 2020. However, for employers sponsoring non-calendar year plans, 9.86% will continue to be the applicable affordability threshold until the new plan begins after January 1, 2020. For questions, please contact your HORAN representative.

Announced under separate guidance, the 2020 affordability contribution percentage for purposes of the individual mandate is 8.24% of the employee’s household income for the year. While the individual mandate still remains, penalties associated have been reduced to zero (effective January 1, 2019).