The Affordability Test for 2021 Health Plans
The Affordable Care Act’s employer shared responsibility provision — often called the employer mandate or “play or pay” — requires large employers to offer health coverage to their full-time employees or face a potential penalty. (Employers with fewer than 50 full-time and full-time-equivalent employees are exempt.) Large employers can avoid the risk of any play or pay penalties by offering all full-time employees at least one group health plan option that meets two standards: It provides minimum value and it is affordable.
Minimum value means the plan’s share of total allowed costs is at least 60 percent and the plan provides substantial coverage of physician services and inpatient hospital services.
Affordable means the employee’s required contribution (payroll deduction) for self-only coverage, if elected, does not exceed a certain percentage of the employee’s household income. The affordability percentage changes slightly each year based on the law’s indexing rule. For 2020, the percentage is 9.78 percent. For 2021, however, the percentage increases to 9.83 percent.
Although the change is minor, it means that employers may increase their plan’s employee-only contribution rate and still meet the affordability standard next year.
The first step in determining whether a group health plan option is affordable is to define the employee’s “income.” Employers do not know their workers’ total household income, so the play or pay rules offer employers three optional safe harbor methods to define income using information known to the employer. Employers may use any of the safe harbor methods. They also may use different methods for different classes (such as one method for hourly employees and another method for salaried employees), provided that the chosen method is applied uniformly to all employees in the class.
The three IRS safe harbor methods are:
1. Federal Poverty Line (FPL)
The FPL method is the easiest of the three methods. Multiply the mainland FPL amount for a single-member household by the affordability percentage, then divide by 12. As long as the self-only contribution rate does not exceed the resulting amount, the plan’s coverage is deemed affordable. For instance:
- 2020: ($12,490 x 9.78%)/12 = $101.79 per month
- 2021: ($12,760 x 9.83%)/12 = $104.52 per month
The FPL chart is updated every year in late January. For 2021 calendar-year health plans, the employer needs to refer to the current FPL amount ($12,760) since the new FPL amount will not be available until after the plan year starts. If the health plan year starts February 1, 2021or later, however, the employer may refer to the new FPL amount which likely will be a little higher.
2. Rate of Pay
This is the most convenient method to define income when applied to hourly employees. Multiply the employee’s hourly rate of pay times 130 hours per month (regardless of how many hours he or she actually works), then multiply by the affordability percentage. As long as the self-only contribution rate does not exceed the resulting amount, the plan’s coverage is deemed affordable. For instance:
- 2020: ($11* x 130) x 9.78% = $139.85 per month
- 2021: ($11* x 130) x 9.83% = $140.57 per month
* Replace $11 with the hourly employee’s rate of pay.
For salaried employees, the rate of pay method is somewhat complicated so employers generally avoid using this method for non-hourly employees.
The W-2 method requires using current W-2 wages instead of looking back at the prior year. W-2 wages means the amount that will be reported in Box 1 of Form W-2. Pretax contributions, such as § 125 plan contributions and 401(k) or 403(b) plan deferrals, are not included in Box 1, so using the W-2 safe harbor method may understate the employee’s actual income. Coverage will be deemed affordable if, for each month of the plan year, the self-only contribution does not exceed the Box 1 amount multiplied by the affordability percentage.
Large employers can avoid the risk of potential penalties under the ACA’s play or pay rules by ensuring that they offer full-time employees at least one minimum value plan option that also is affordable. Affordable means the employee’s contribution to elect self-only coverage would not exceed a certain percentage of the employee’s income.
The percentage used to determine affordability changes from year to year is based on the law’s indexing formula. For 2020 plan years, the affordability percentage is 9.78 percent, but it increases to 9.83 percent for 2021 plan years. Employers and their advisors will want to keep this information in mind as they finalize their group health plan offerings and employee contribution rates for 2021.