Don't Overlook 2018 Change in 'Affordability' Safe Harbor Percentage

The Affordable Care Act (ACA) has many moving parts, and not to be overlooked is the annual inflation-adjusted shift in what constitutes "affordable" health care coverage.

In May, the IRS announced in Revenue Procedure 2017-36 the 2018 shared-responsibility affordability percentage. For plan years beginning in 2018, employer-sponsored coverage will be considered affordable if an employee's required contribution for self-only coverage for the least-expensive plan option that meets ACA requirements does not exceed 9.56 percent of the employee's household income for the year (down from 9.69 percent in 2017).

Since employers don't know their employees' household incomes, the ACA created a safe harbor in which any of the following can be used in lieu of household income:

• 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—hourly wage rate x 130 hours, as of the first day of the plan year.
  

• The individual Federal Poverty Level (FPL)—Since the FPL isn't officially published until January, employers can use the FPL in effect six months prior to the beginning of the plan year.
  For 2018, the maximum monthly premium contribution that meets the FPL safe harbor will be 9.56 percent of the prior year's federal poverty level ($12,060 in most states for 2017) divided by 12, or $96.08.
  
  

"Employers should consider the adjustments to the affordability contribution percentage in developing a contribution strategy for 2018," wrote Richard Stover and Leslye Laderman, consultants with Conduent HR Services, in their recent analysis. Employers "may be able to increase the required employee contribution for their lowest-cost self-only coverage and still satisfy one of the safe harbors."

"Because the 2018 affordability rate is lower than the 2017 affordability rate, applicable large employers may need to reduce their employees' share of premium contributions to maintain affordable coverage," commented Danielle Capilla, chief compliance officer at United Benefit Advisors. "Employers should double check their anticipated 2018 premiums now to prevent the need for mid-year changes."

2018 FPL Safe Harbor

"Many employers use the FPL safe harbor to develop employee contributions for self-only coverage to avoid ACA assessments under section 4980H," which the ACA added to the tax code, Stover and Laderman noted. "Using the FPL safe harbor also simplifies ACA reporting and coding of Form 1095-C," the annual reporting through which employers that are subject to the ACA verify that they provided affordable coverage to full-time employees throughout the year.

For 2018, the maximum monthly contribution that meets the FPL safe harbor will be 9.56 percent of the prior year's federal poverty level divided by 12.

Premium Tax Credit Eligibility

Individuals may be eligible for a premium tax credit to purchase health coverage through the ACA's public health care exchanges if, among other things, they are not offered affordable coverage through an eligible employer plan that provides minimum value. For this purpose, Revenue Procedure 2017-36 states that an employer-sponsored plan will be considered affordable for plan years beginning in 2018 if the portion of the annual premium an employee must pay for self-only coverage does not exceed 9.56 percent of his or her household income.

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

Penalty Risk

Applicable large employers (those that had 50 or more full-time equivalent employees during the preceding calendar year) that fail to provide "affordable coverage" are liable for a penalty of $3,000 per year per each full-time employee who receives a premium tax credit through the ACA Marketplace exchange, the Wagner Law Group reminded employers.

Additional Cost-Sharing Limits

There are other ACA plan requirements related to affordability to 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.

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, set by the department of Health and Human Services (HHS).

• For the 2017 plan year, the OOP maximum is $7,150 for an individual and $14,300 for a family plan.
  

• Last December, HHS announced that, for the 2018 plan year, the OOP maximum will be $7,350 for self-only coverage and $14,700 for family coverage.
  

For nongrandfathered health insurance plans, the ACA's self-only annual limit on OOP costs applies to each covered individual, regardless of whether the individual is enrolled in self-only coverage or family coverage.

The IRS annually sets a separate, lower OOP maximum for high-deductible health plans (HDHPs) that can be linked with health savings accounts (HSAs), known as HSA-qualified HDHPs. Below is a comparison of the two sets of limits. 

Individual Mandate Affordability Exemption

The ACA requires individuals to have minimum essential health coverage for each month unless they qualify for an exemption or to pay a penalty when filing their federal income tax return. One exemption applies to individuals who can't afford coverage because the minimum amount they must pay for premiums is more than a designated percentage of the individual's household income.

For plan years beginning in 2018, Revenue Procedure 2017-36 designates this percentage as 8.05 percent of an individual's household income, up from 8.16 percent in 2017.

Related SHRM Article:

Prepare for 2017 ACA Information Reporting, SHRM Online Benefits, September 2017

Related SHRM Resources:

Health Care Reform Resources for Employers 

Related Resource:

1095-C Reporting: How to Use Affordability Safe Harbors, via Integrity Data

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