Affordability Standards
Under the ACA, employer-sponsored minimum essential coverage (MEC) is affordable if an employee’s required contribution for the lowest-cost, self-only option with minimum value does not exceed an annually indexed percentage of the employee’s household income. Employees and their family members eligible for minimum-value employer-sponsored MEC that meets the affordability standard cannot receive premium tax credits or cost-sharing reduction subsidies for public exchange coverage.
To determine liability for play-or-pay assessments, three employer safe harbors allow replacing household income in the affordability calculation with one of these figures:
- Form W-2 wages
- Rate of pay
- Federal poverty line (FPL)
The affordability percentage used in the employer safe harbors is indexed in the same manner as the household income percentage, according to 2015 IRS guidance.
Indexing Formula
As explained in IRS Rev. Proc.2014-37, the original 9.5% affordability percentage is annually adjusted after 2014. For years prior to 2020, this adjustment reflected the ratio of the premium growth rate for employer-sponsored health coverage to the national income growth rate in the previous year.
Because premiums for individual-market and employer-sponsored health coverage increased at a lower rate than the national income growth rate during 2019, the 2020 percentage will drop below the 2019 level.
Employer Considerations
Employers should review the required employee contribution for 2020 coverage if they plan to meet the ACA’s affordability limit under the applicable safe harbor. For the many 2020 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 9.78% of the Federal Poverty Level for a particular area — $12,490 for mainland US — or $101.79 per month.
