ACA’s Affordability Contribution Percentages Increased for 2017

May 31, 2016

Quick Facts:

  • Several Affordable Care Act (ACA) provisions measure the “affordability” of employer-sponsored health coverage.
  • "Affordability" is defined differently depending on the specific ACA provision.
  • Employers subject to the ACA’s employer shared responsibility provisions may be subject to penalties if the coverage offered to full-time employees is unaffordable.
  • The different measurements of affordability are summarized and compared in this article.

Several Affordable Care Act (ACA) provisions measure the affordability of employer-sponsored health coverage:

  • the shared responsibility penalty for applicable large employers (ALEs) (also known as “play or pay” or the “employer mandate”);
  • an exemption from the tax penalty imposed on individuals who fail to obtain health insurance coverage (also known as the “individual mandate”); and
  • the premium tax credit for low-income individuals to purchase health coverage through an ACA Marketplace (Exchange).

Last month, the Internal Revenue Service (IRS) issued Revenue Procedure 2016-24 to adjust the threshold contribution percentages in 2017 for purposes of determining the affordability of an ALE’s group health plan under the ACA.

For plan years beginning in 2017, employer-sponsored coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed:

  • 9.69 percent of the employee’s household income for the year, for purposes of ACA employer shared responsibility rules and premium tax credit eligibility; and
  • 8.16 percent of the employee’s household income for the year, for purposes of an exemption from the individual mandate.

The updated affordability percentages are effective for tax years and plan years beginning after December 31, 2016.

Although all of these ACA mandates involve an affordability determination, the test for affordability varies for each provision, as described in the chart below.

ACA Mandate

Summary

Affordability Measure for Employees

Affordability Measure for Family Members

Employer Shared Responsibility Penalty

Applicable large employers that do not offer health coverage to their full-time employees (and children), or that offer coverage that is unaffordable or does not provide minimum value, may be subject to a penalty.

Coverage is affordable if the employee portion of the premium for the   lowest-cost, self-only coverage that provides minimum value does not exceed 9.5* percent of an employee’s W-2 wages, rate-of-pay income or the federal   poverty level for a single individual. For 2016, this affordability measure increased to 9.66 percent. In 2017, the measure increases to 9.69 percent.

Coverage is affordable if the employee’s self-only coverage cost   (under the lowest-cost minimum value plan) does not exceed 9.5* percent of an employee’s W-2 wages, rate-of-pay income or the federal poverty level for a single individual. For 2016, this affordability measure increased to 9.66 percent. In 2017, the measure increases to 9.69 percent.

The cost of family coverage is not taken into account.

Individual   Mandate

Most individuals must obtain health coverage for themselves and their family members or pay a penalty. However, individuals who lack access to   affordable minimum essential coverage are exempt from the individual mandate.

Coverage is affordable if the required contribution for the   lowest-cost, self-only coverage does not exceed 8.13 percent of household income in 2016 and 8.16 percent of household income in 2017.

Coverage is affordable if the required contribution for the lowest-cost family coverage does not exceed 8.13 percent of household income in 2016 and 8.16 percent of household income in 2017.

Premium Tax Credit

The premium tax credit helps eligible individuals and families purchase health insurance through an ACA Marketplace.

Employees (and their family members) who are eligible for coverage under an employer-sponsored plan that is affordable and provides minimum value are not eligible for ACA’s premium tax credit.

Coverage is affordable if the employee’s cost for self-only coverage   does not exceed 9.66 percent in 2016 and 9.69 percent in 2017.

Coverage is affordable if the employee’s cost for self-only coverage does not exceed 9.66 percent in 2016 and 9.69 percent in 2017.

The cost of family coverage is not taken into account.

* In December, 2015 IRS Notice 2015-87 clarified that the affordability safe harbor percentage for ALEs is the same as the inflation-adjusted percentage that determines affordable health coverage that applies to individuals for purposes of the premium tax credit, and further, ALEs using an affordability safe harbor could – but were not required to – rely upon 9.56% to measure affordability for coverage offered in 2015 and 9.66% for coverage offered in 2016.

Employer shared responsibility penalty

Under the ACA’s employer shared responsibility provisions, applicable large employers (ALEs) that do not offer health coverage to their full-time employees (and their children), or that offer coverage that is either unaffordable or does not provide minimum value, may be subject to a penalty. An ALE is an employer with 50 or more full-time employees, or an equivalent combination of full-time and part-time employees. 

Employer shared responsibility affordability determination

Affordability of health coverage offered by an ALE is a key point in determining whether the employer may be subject to a play or pay penalty. Coverage is considered affordable if an employee’s portion of the self-only premium for his or her employer’s lowest-cost coverage that provides minimum value does not exceed a specified percent of the employee’s household income for the tax year (noted in the first row in the above chart). The determination applies regardless of whether the employee is eligible for another level of health plan coverage, such as family coverage. Thus, the cost of family coverage is not taken into account to determine whether an employer’s health plan is affordable for purposes of the play or pay penalty.

Employers may be largely unaware of the income levels of their employees’ family members, so they could find it difficult to assess whether the coverage they offer would be considered affordable. To address this issue, the IRS provides three affordability safe harbors that allow an employer to determine the affordability of its health coverage without knowing an employee’s household income, as follows:

  • Form W-2: Under the Form W-2 safe harbor, an employer compares the cost of self-only health coverage to an employee’s wages from that employer that are required to be reported in Box 1 of the employee’s Form W-2 to determine whether the cost exceeds the specified percent of income (first row of above chart).
  • Rate-of-Pay: Under the rate-of-pay safe harbor, affordability is determined by comparing the cost of self-only coverage to an employee’s rate of pay. For salaried employees, the employer uses the employee’s monthly salary to determine affordability. For hourly employees, the employer would multiply the employee’s hourly rate of pay by 130 hours per month and determine affordability based on the resulting monthly wage amount.
  • Federal Poverty Level: The federal poverty level (FPL) safe harbor measures affordability based on the FPL for a single individual in effect within six months before the first day of the plan year.

Individual mandate

The ACA requires most individuals to obtain acceptable health coverage for themselves and their family members or pay a penalty. Because this provision has the effect of “requiring” individuals to have coverage, it is often referred to as the “individual mandate.” The penalty will be assessed against an individual for any month during which he or she does not maintain minimum essential coverage (MEC)unless an exemption applies. The requirement applies to individuals of all ages, including children.

MEC includes coverage under:

  • a government-sponsored program (such as coverage under Medicare or Medicaid, CHIP, TRICARE and certain types of veterans’ health coverage);
  • an eligible employer-sponsored plan (including COBRA and retiree coverage);
  • a health plan purchased in the individual market; or
  • a grandfathered health plan.

MEC does not include specialized coverage, such as coverage only for vision or dental care, workers’ compensation, disability policies or coverage only for a specific disease or condition.

Individual mandate affordability exemption

The ACA includes a number of exemptions from the individual mandate. Under one of these exemptions, individuals who lack access to affordable MEC are exempt from the individual mandate penalty. This exemption avoids making an individual pay a tax penalty if his or her self-only health coverage option is unaffordable as determined by the IRS.

IRS guidance provides the following affordability measures for employees and family members:

  • Coverage is unaffordable to an employee who is eligible to purchase coverage through his or her employer if the required contribution for the lowest-cost, self-only coverage would be more than a specific percentage of household income (noted in the second row of the above chart).
  • For family members who are eligible to purchase coverage through an employer-sponsored plan, coverage is unaffordable if the required contribution for the lowest-cost, family coverage would exceed a specific percentage of household income (second row of the above chart).

Thus, unlike the employer shared responsibility penalty and the premium tax credit, the individual mandate’s measure of affordability for family members takes into account the cost of family coverage.

Under the individual mandate’s exemption rules, the required contribution for self-only coverage under an employer-sponsored plan may cost less than specified percentage of household income, while the required contribution for family coverage under the same employer plan may cost more than the specified percentage of household income. In this case, the employee is not exempt from the individual mandate, while the employee’s spouse and other dependents would be exempt.

Premium tax credit

The ACA created a premium tax credit to help eligible individuals and families purchase health insurance through a Marketplace. By reducing a taxpayer’s out-of-pocket premium costs, the credit is designed to make coverage through a Marketplace more affordable. To be eligible for the premium tax credit, a taxpayer:

  • must have household income for the year between 100 and 400 percent of FPL for the taxpayer’s family size;
  • may not be claimed as a tax dependent of another taxpayer; and
  • must file a joint return, if married.

In addition, to receive the premium assistance, a taxpayer must enroll in one or more qualified health plans through a Marketplace. Also, the taxpayer cannot be eligible for MEC (such as coverage under a government-sponsored program or an eligible employer-sponsored plan). Employees who may enroll in an employer-sponsored plan, and individuals who may enroll in the plan because of a relationship with an employee, are generally considered eligible for MEC if the plan is affordable and provides minimum value.

Affordability determination

Employees (and their family members) who are eligible for coverage under an employer-sponsored plan that is affordable and provides minimum value are not eligible for the premium tax credit. To determine an employee’s eligibility for a tax credit, the ACA provides that employer-sponsored coverage is considered affordable if the employee’s cost for self-only coverage does not exceed a specific percentage of the employee’s household income for the tax year (noted in the third row of the above chart). Also, the affordability determination for families is based on the cost of self-only coverage, not family coverage.