Affordability Threshold Set to Increase in 2019

Late last week, the IRS released Rev. Proc. 2018-34 which, among other items, set the affordability threshold for employers in 2019. In order to avoid a potential section 4980H(b) penalty (aka Pay or Play penalty), an employer must make sure one of its plans provides minimum value and is offered at an affordable price. An actuary will determine whether the minimum value threshold has been satisfied and this is generally not an issue for employers. However, an employer is in control as to whether the plan it is offering meets the affordability threshold.

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 2018 the affordability threshold decreased from 9.69 percent to 9.56 percent. However, similar to every other year, the affordability threshold is scheduled to increase in 2019. In 2019 the affordability threshold will be 9.86 percent. The significant increase compared to 2018 provides an employer who is toeing the line of the affordability threshold an opportunity to increase the price of its health insurance while continuing to provide affordable coverage.

An employer wishing to use one of the affordability safe harbors will use the 2019 affordability threshold of 9.86 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 9.86 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 employee, 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 9.86 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 9.86 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 9.86 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 2019 is $12,140. Therefore, an employee’s monthly cost for self-only coverage cannot exceed $99.75 in order to satisfy the federal poverty line safe harbor.

When planning for the 2019 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. Should you have any questions on determining the affordability of a plan or any other questions related to the Forms 1094-C and 1095-C, please don’t hesitate to contact us.