Employers covered by the Affordable Care Act (ACA) (50 or more full-time employees or equivalents) are required to provide healthcare coverage to avoid the employer mandate shared responsibility penalties. The ACA also requires that the cost of the provided healthcare is considered “affordable” for the participant.
For a plan to be considered affordable, employers must have at least one health plan option where the employee’s share of single coverage is less than the affordability percentage multiplied by the employee’s household income. The IRS adjusts the affordability percentage each year. For 2022, the percentage has been adjusted down from 9.83 percent to 9.61 percent. Since the percentage went down, it is possible that employers may have an unaffordable plan in 2022, even though it was affordable last year, and more importantly, even if everything else stayed exactly the same.
As a safe harbor, employers may use the federal poverty level (FPL) to automatically meet the ACA affordability standard. For 2022, an employee-only plan can cost employees no more than $103.14 per month to automatically be considered affordable; whereas, in 2021, to meet the standard a plan could cost no more than $104.53 per month.
In addition to the FPL safe harbor, there are also two other safe harbor calculations which may be used to determine affordability, but unlike the use of the FPL, these calculations are not automatically deemed affordable. Employers may use the following alternative methods to determine affordability:
- Form W-2 Safe Harbor: Employees’ W-2 wages, as reported in Box 1, generally as of the first day of the plan year.
- Rate of Pay Safe Harbor: Employees’ rate of pay, which is the hourly wage rate multiplied by 130 hours per month as of the first day of the plan year or, for salaried employees, 9.61 percent of the monthly salary as of the first day of the 2022 coverage period.
Non-calendar year plans will continue to use the 9.83 percent affordability threshold to determine affordability in 2022 until their new plan year starts.
Next Steps for Employers
Employers should review their health plan contribution rate on an annual basis to ensure the plan is considered affordable as not doing so may result in penalties for each employee who enrolls in exchange coverage and qualifies for financial assistance.
Employers are encouraged to review the IRS’ Employer Shared Responsibility Provisions for ACA affordability requirements and penalties for non-compliance. Employers who need additional guidance on the best safe harbor method to use should consult with their legal counsel and/or tax professional.