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IRS Raises 2021 Employer Health Plan Affordability Threshold to 9.83% of Pay

Limit on health plan costs as percentage of employees' income is adjusted annually

A medical mask and stethoscope on top of a dollar bill.

Editor's note: For the 2022 health plan year affordability threshold, see the SHRM Online article IRS Lowers 2022 Employer Health Plan Affordability Threshold to 9.61% of Pay.

[updated Sept. 4, 2020]

The IRS has announced that employer-sponsored health coverage will satisfy the Affordable Care Act (ACA) affordability requirement next year if the lowest-cost, self-only coverage option an employer offers does not exceed 9.83 percent of an employee's household income.

The 2021 threshold is up slightly from 9.78 percent in 2020 but below the 2019 rate of 9.86 percent.

The affordability threshold is the highest percentage of household income an employee can be required to pay for monthly health insurance plan premiums, based on the least expensive employer-sponsored plan offered that meets the ACA's minimum essential coverage requirements.

The IRS annually adjusts the affordability threshold by considering the ratio of premium growth to income growth in the preceding calendar year. The agency announced the 2021 affordability threshold—also known as the shared-responsibility affordability percentage, or cost-sharing limit—on July 21 in Revenue Procedure 2020-36.

"Because premiums for individual-market and employer-sponsored health coverage increased at a greater rate than the national income growth during 2020, the 2021 affordability percentage will be higher than the 2020 level," explained Dorian Smith, a partner at HR consultancy Mercer in New York City, and Cheryl Hughes, a principal in the firm's Washington, D.C. office.

Employers should consider the adjustments to the affordability threshold when determining employee cost-sharing amounts—and the employer's health plan premium contribution strategy—for the 2021 health plan year, Smith and Hughes advised.

Employers should price at least one plan option below the threshold to avoid triggering steep penalties for failing to provide affordable coverage under the ACA's shared-responsibility provisions, which the ACA added to the tax code under Section 4980H(b).

"An employer is in control as to whether the plan it is offering meets the affordability threshold," noted Ryan Moulder, a Los Angeles-based partner at Health Care Attorneys PC and general counsel at Accord Systems LLC, an ACA compliance software firm.

"Obviously employers are dealing with a lot of issues as the COVID-19 crisis continues to impact almost every employer in the country," he added. "However, it is important for employers to remain compliant with the always-evolving ACA rules and regulations."

Affordability Safe Harbors

The affordability threshold is a key element of the ACA employer mandate—also called the shared-responsibility requirement, or the pay-or-play rules—and applies to applicable large employers (ALEs). In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year.

Because employers don't know their employees' household incomes, there are three affordability safe harbors ALEs can use to determine if the annual affordability threshold is being met. The safe harbors are based on information the employer does have, and any of the three can be used:

  • The employee's W-2 wages, as reported in Box 1, generally as of the first day of the plan year.
  • The employee's 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, 9.83 percent of the monthly salary as of the first day of the coverage period.
  • The individual federal poverty level (FPL), as published by the Department of Health and Human Services (HHS) each January. Using the FPL safe harbor simplifies ACA reporting and coding of Form 1095-C, which plan sponsors file with the IRS for each employee who is offered ACA-compliant health coverage.

FPL Safe Harbor Adjustments

For 2021 plans using the FPL safe harbor to determine affordability, an employee's premium payment can't exceed $104.53 per month, up from $101.79 per month in 2018.

"The adjusted percentage applies on a plan-year basis," wrote Mercer's Smith and Hughes. "For the many 2021 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 9.83 percent of the FPL [which is] $12,760 for mainland U.S—or $104.53 per month, calculated as (9.83 percent x $12,760 FPL for 2020) ÷ 12, rounded to the nearest penny," they explained.

[Clarification: The above calculation yields the figure $104.52566. Most benefit advisors, including Mercer (as noted) are rounding this amount up to $104.53, which is the amount this article has reported. But others have rounded down to $104.52, perhaps out of an abundance of caution.]

Affordability Safe Harbor Using Federal Poverty Level

Calender-Year Plan
Prior Year's Federal Poverty Level
(One-Person Household)
Affordability Percentage
Maximum Monthly Contribution

Sources: Mercer.

"Employers offering a medical plan option in 2021 that costs employees no more than $104 per month for employee-only coverage will automatically meet the ACA affordability standard" under this approach, wrote Brian Gilmore, lead benefits counsel at ABD Insurance & Financial Services in San Francisco.

"In most cases, ALEs that do not meet the federal poverty-line affordability safe harbor will want to use the rate-of-pay affordability safe harbor," he commented.

[SHRM members-only toolkit: Communicating with Employees About Health Care Benefits Under the Affordable Care Act]

Minimum Value Requirement

Another ACA cost-sharing limit that employers must keep in mind is the requirement to provide minimum value by having an actuarial value of at least 60 percent, meaning the plan pays for at least 60 percent of covered benefits without employee cost-sharing.

"An actuary will determine whether the minimum-value threshold has been satisfied," Moulder said.

Update: IRS Raises Penalties for 2021

On Aug. 19, the IRS released new Questions and Answers (Q&A) guidance on the ACA's employer shared responsibility provisions (the employer mandate) for plan year 2021.

Q&A #40 confirms previously announced 2021 affordability percentage of 9.83 percent, up from 9.78 percent for plan years beginning in 2020.

Q&A #55 lists the 2021 indexed annual ACA employer mandate amounts for 4980H(a) and (b) penalties. The new amounts have been added to the discussion below.

Penalties to Avoid

ALEs that fail to provide full-time workers with minimum essential coverage that meets affordability and minimum value thresholds are subject to two sets of penalties, which the IRS refers to as shared-responsibility payments:

• The Section 4980H(a) penalty—the A penalty—applies when the ALE does not offer minimum essential coverage to at least 95 percent of its full-time employees in any given calendar month and at least one full-time employee receives a premium tax credit to help pay for coverage through an ACA marketplace exchange. Full-time employees are those who average 30 or more hours of work per week. The penalty is waived for the first 30 full-time employees. 

Employees with household income between 100 percent and 400 percent of the federal poverty level are eligible for tax credits for exchange coverage if they do not have access to affordable employer-sponsored coverage that provides at least minimum value.

  • The A penalty in 2020 is $214.17 per month ($2,570 annualized), multiplied by all full-time employees (minus the first 30). For 2021, the penalty increases to $225 per month ($2,700 annualized).

• The Section 4980H(b) penalty—the B penalty—is where the affordability threshold comes into play. It applies when the ALE does offer coverage to at least 95 percent of full-time employees, but each full-time employee was not offered an option of "minimum essential coverage" that was "affordable" and provided "minimum value." The penalty is triggered when a full-time employee of an ALE declines an offer of noncompliant coverage and instead enrolls in subsidized coverage on the ACA marketplace exchange.

  • The B penalty for 2020 is $321.67 per month ($3,860 annualized) per full-time employee receiving subsidized coverage on the ACA marketplace exchange. For 2021, the penalty increases to $338.33 per month ($4,060 annualized).

The IRS sends Letter 226J to inform ALEs of their potential liability for an employer shared-responsibility payment.

"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 … for each of its full-time employees," Moulder advised. "It would not be surprising if individuals were more scrupulous with their health care choices in 2021, which could leave noncompliant employers exposed to section 4980H(b) penalties."

Out-of-Pocket Maximums for 2021

Nongrandfathered group health plans also must comply with an annual limit on cost-sharing, known as an out-of-pocket (OOP) maximum, which is set annually by the HHS. This limit takes into account an employee's spending under the plan deductible, as well as co-payments and percentage-of-cost co-sharing payments, but not plan premiums.

The self-only OOP maximum is applied to each covered individual, whether the individual is enrolled in self-only coverage or family coverage.

The IRS sets a separate and lower OOP maximum annually, exclusively for high-deductible health plans (HDHPs) that can be coupled with health savings accounts (HSAs), known as HSA-qualified HDHPs.

Below are the two sets of limits for 2021 compared with 2020.

Out-of-pocket limits for ACA-compliant plans (HHS)

Self-only: $8,550

Family: $17,100

Self-only: $8,150

Family: $16,300

Out-of-pocket limits for HSA-qualified HDHPs (IRS)

Self-only: $7,000

Family: $14,000

Self-only: $6,900

Family: $13,800

Source: IRS and HHS.

Checklist for ACA Reporting

The IRS offers this advice for employers that are preparing for ACA reporting:

  • Determine ALE status for this year, based on the prior year's data. Identify full-time employees based on the ACA's definition of full time (averaging 30 hours of work or more per week during a month), considering special classifications such as staffing employees, independent contractors, temporary or short-term employees, and even interns.
  • Assess whether the monthly measurement method or look-back measurement method to determine full-time status is best, based on the nature of the company's workforce. Update plan documents and summary plan descriptions, if necessary, for the measurement method selected.
  • Select the appropriate safe harbor the company will use for the affordability calculation: W-2, rate of pay, or federal poverty line.
  • Make sure Social Security number request obligations are being fulfilled.
  • Check reporting obligations for non-ALEs that self-insure group health plans.
  • Review the instructions for required forms, noting changes from prior years.

IRS Q&As provide more information on reporting offers of health insurance coverage and on 1095 filing requirements.

Related SHRM Articles:

IRS Extends Form 1095 Distribution Deadline to March 2SHRM Online, October 2020

Planning 2021 Benefits Changes for the COVID-19 Era, SHRM Online, July 2020

IRS Announces 2021 Limits for HSAs and High-Deductible Health Plans, SHRM Online, May 2020

HHS 2021 Health Plan 'Parameters' Raise Out-of-Pocket MaximumsSHRM Online, May 2020

Related SHRM Resources:

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