IRS Lowers Employer Health Plans' 2020 Affordability Threshold

Employer-sponsored health coverage will satisfy the Affordable Care Act (ACA) affordability requirement in 2020 if the lowest-cost, self-only coverage option available to employees does not exceed 9.78 percent of an employee's household income. This limit is down from 9.86 percent in 2019.

The IRS announced the 2020 shared-responsibility affordability percentage on July 22 in Revenue Procedure 2019-29. Employees' maximum contribution percentage is adjusted annually by considering the ratio of premium growth to income growth in the preceding calendar year.

Employers should not overlook the annual inflation-adjusted shift in cost-sharing limits for group health plan coverage, as they could face steep penalties for failing to provide affordable coverage under the ACA's shared-responsibility provisions.

"Employers now have the tools to evaluate the affordability of their plans for 2020," noted an alert from HUB International, a global insurance brokerage. "For some employers, a reduction in the affordability percentage will mean that they will have to reduce what employees pay for employee-only coverage if they want their plans to be affordable in 2020."

In 2019, for instance, an employer using the hourly-rate-of-pay safe harbor to determine affordability can charge an employee earning $12 per hour up to $153.81 per month for employee-only coverage. In 2020, an employee earning $12 per hour can be charged only $152.56 per month, according to HUB International.

However, the federal poverty level (FPL) rose last year, so for employers that use the FPL safe harbor to meet the affordability requirement, employees' monthly contributions to their lowest-cost plan will be capped at $101.79 in 2020, slightly up from $99.75 in 2019, wrote Dorian Z. Smith, a partner at HR consultancy Mercer, and Cheryl Hughes, a principal at the firm.

An Annual Adjustment

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

Employers should price at least one plan option below the threshold to avoid triggering shared-responsibility penalties under tax code Section 4980H(b).

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

Affordability Safe Harbors

Because employers don't know their employees' household incomes, there are three affordability safe harbors employers can use that are based on information the employer does have. The safe harbors, any of which can be used, are:

• The employee's W-2 wages, as reported in Box 1, generally as of the first day of the plan year (see IRS Questions and Answers).
  

• 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.
  

• The individual FPL, which is the FPL as of six months prior to the beginning of the plan year, since the FPL isn't published until January for a given year.
  

"Employers should consider the adjustments to the affordability contribution percentage in developing a contribution strategy for 2020. They may be able to increase the required employee contribution for their lowest-cost self-only coverage and still satisfy one of the safe harbors," wrote Richard Stover and Leslye Laderman, consultants with Buck, an HR consultancy.

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

2020 FPL Safe Harbor

Many employers use the FPL safe harbor to set employee contributions for self-only coverage. "Using the FPL safe harbor also 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, according to Stover and Laderman.

For 2020, the maximum monthly premium contribution that meets the FPL safe harbor will be 9.86 percent of the prior year's FPL ($12,490 for the mainland U.S.) divided by 12, or $101.79.

"The adjusted percentage applies on a plan-year—not calendar-year—basis. This means noncalendar-year plans will continue to use 9.86 percent to determine affordability in 2020 until their new plan year starts," according to Smith and Hughes. "Noncalendar-year plans won't be able to calculate the FPL safe harbor contribution limit for plan years beginning after Jan. 1, 2020, until the Department of Health and Human Services [HHS] issues the 2020 FPL guidelines in January or February 2020."

Shared-Responsibility Penalty

The IRS can impose a shared-responsibility penalty when an employer with 50 or more full-time or equivalent employees—known as an applicable large employer (ALE)—fails to offer minimum essential coverage to "substantially all" of its full-time employees and their dependent children during a month, if at least one full-time employee receives a premium tax credit through the ACA's public marketplace exchange. An ALE satisfies the "substantially all" standard for any given month if it offered coverage to at least 95 percent of its full-time employees and their dependent children during that month.

The table below summarizes the ACA indexed dollar limits for 2020 and prior years.

Source: IRS and Buck.

Additional Cost-Sharing Limits

For 2019, there are other ACA cost-sharing limits that employers must keep in mind:

Minimum Value
An ACA-compliant plan must provide minimum value by having an actuarial value of at least 60 percent, the statute states, meaning the plan pays for at least 60 percent of covered benefits.

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

Out-of-Pocket Maximums
Nongrandfathered group health plans must comply with an annual limit on cost-sharing, known as an out-of-pocket (OOP) maximum, which is set 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. In addition, 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 2020 compared with 2019.

Source: IRS and HHS.

Related SHRM Articles:

IRS Allows Health Plans to Cover More Treatments Before Deductible Is Met, SHRM Online, July 2019

2020 HSA Limits Rise Modestly, IRS Says, SHRM Online, May 2019

[Visit SHRM's resource page on the Affordable Care Act.]