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The 2021 open enrollment season is quickly approaching. This week the IRS released Rev. Proc. 2020-36 which, among other items, set the affordability threshold for employers in 2021. In order to avoid a potential section 4980H(b) penalty, an employer must make sure one of its plans provides minimum value and is offered at an affordable price.
A plan is considered affordable under the ACA if the employee’s contribution level for self-only coverage does not exceed 9.5 percent of the employee’s household income. This 9.5 percent threshold is indexed for years after 2014. In 2021 the affordability threshold will be 9.83 percent which is up slightly from the 2020 affordability threshold of 9.78 percent.
An employer wishing to use one of the affordability safe harbors will use the 2021 affordability threshold of 9.83 percent when determining if the safe harbor has been satisfied. The first affordability safe harbor an employer may utilize is referred to as the form w-2 safe harbor. Under the form w-2 safe harbor, an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.83 percent of that employee’s form w-2 wages (box 1 of the form w-2) from the employer for the calendar year.
The second affordability safe harbor is the rate of pay safe harbor. The rate of pay safe harbor can be broken into two tests, one test for hourly employees and another test for salaried employees. For hourly employees an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.83 percent of the product of the employee’s hourly rate of pay and 130 hours. For salaried employees an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.83 percent of the employee’s monthly salary.
The final affordability safe harbor is the federal poverty line safe harbor. Under the federal poverty line safe harbor, an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.83 percent of the monthly Federal Poverty Line (FPL) for a single individual. The annual federal poverty line amount to use for the United States mainland in 2021 is $12,760. Therefore, an employee’s monthly cost for self-only coverage cannot exceed $104.52 in order to satisfy the federal poverty line safe harbor.
Obviously employers are dealing with a lot of issues as the COVID-19 crisis continues to impact almost every employer in the country. However, it is important for employers to remain compliant with the always evolving ACA rules and regulations. When planning for the 2021 plan year, every employer should check to make sure at least one of its plans that provides minimum value meets one of the affordability safe harbors discussed above for each of its full-time employees. It would not be surprising if individuals were more scrupulous with their healthcare choices in 2021 which could leave noncompliant employers exposed to section 4980H(b) penalties.