The Affordable Care Act (ACA) considers the affordability of employer-sponsored health plans for the purposes of the shared responsibility rules and the premium tax credit (PTC). Affordability depends on a certain percentage of the employee’s household income for the tax year, which is typically adjusted annually for inflation. Recent guidance from the Internal Revenue Service (IRS) decreases the affordability percentage from 9.83 percent in 2021 to 9.61 percent in 2022.
Beginning January 1, 2022, employer-sponsored coverage will be considered affordable if the employee’s required contribution for self-only coverage under the most affordable medical plan they are eligible for does not exceed 9.61 percent of the employee’s household income for the year. No matter what type of coverage an employee actually elects, the single premium rate is always the basis for calculating affordability.
The new affordability percentage is essential for applicable large employers (ALEs) to know because the ACA requires them to offer affordable, minimum value health coverage to their full-time employees or pay an employer mandate penalty. The affordability percentage decrease for 2022 means that employers may need to increase the amount that they contribute towards employee coverage in order for their employee benefits to remain affordable.
The IRS has created three safe harbors for group health plans to establish and report on benefits affordability: the federal poverty line safe harbor, the rate of pay safe harbor, and the W-2 safe harbor (which is based on Box 1 of the W-2). The rate-of-pay and the W-2 safe harbors are calculated on an employee-by-employee basis, while the federal poverty line safe harbor is a dollar constant. A monthly employee contribution of $103.14 or less will satisfy the federal poverty line safe harbor in 2022, as the federal poverty line for a single individual is $12,880 in everywhere but Alaska and Hawaii.
It is important for employers to keep in mind that the ACA health insurance exchange marketplaces also consider affordability when determining an employee’s eligibility for a premium tax credit. If an ALE’s full-time employee purchases exchange-based individual coverage and receives a PTC because their lowest-cost, employee-only monthly contribution exceeds 9.61% of their household income for the 2022 plan year, that credit will trigger a shared responsibility penalty for the employer.