What is “Affordable?”
When applying ACA tax regulations to Tax Year 2019, “affordable” means that the employee’s share of self-only health coverage cannot exceed 9.86% of household income.
The ACA affordability percentage is written in the Internal Revenue Code as 9.86%, but subsequent IRS guidance hinted at adjustments for inflation and sure enough:
- 9.56%* for Tax Year 2015 (IRS Rev. Proc. 2014-37)
- 9.66% for Tax Year 2016 (IRS Rev. Proc. 2014-62)
- 9.69% for Tax Year 2017 (IRS Rev. Proc. 2016-24)
- 9.56% for Tax Year 2018 (IRS Rev. Proc 2017-36)
- 9.86% for Tax Year 2019 (IRS Rev. Proc 2018-34)
So, one way to do ACA affordability calculations in 2019 is: for 2019 calendar-year plans using the federal poverty level (FPL) safe harbor (see below) to determine affordability, an employee’s premium payment can’t exceed $99.75 per month, up from $96.08 per month in 2018.
The 3 Affordability Safe Harbors for Employers
Since employers often don’t know their workers’ household incomes, the IRS allows the employer to use one or all three of these tests for affordability, any of which can be used in place of household income:
- W-2 Wages safe harbor
- Rate-of-Pay safe harbor
- Federal Poverty Line (FPL) safe harbor
Just one safe harbor per plan. Employers with multiple plans can apply different safe harbors to different plans – they need not be identical.
What are the penalties associated with this?
If an employee’s share of the premium for the lowest cost self-only option offered by the employer is more than 9.86% (2019) of his or her household income, the coverage is not considered affordable for that employee and the ALE member may be liable for an employer-shared responsibility penalty under Section 4980(b) if that employee obtains a premium tax credit for health coverage purchased through the marketplace.
The original $3,000 amount associated with this penalty has been adjusted each calendar year after 2014.
- In 2016, the penalty was $3,240 per employee per year.
- In 2017, the penalty was $3,390.
- In 2018 the penalty amount was $3,480.
- In 2019, the penalty amount is $3,750 per employee per year.
Note that this is the penalty for not offering affordable coverage and that this penalty applies to all employees, not just the one that was not offered affordable coverage!
There are other ACA penalties:
- Penalties for not offering MEC and MV coverage
- Reporting penalties for not documenting ACA compliance