If you’re an applicable large employer (ALE) with more than 50 full-time equivalent employees, that means your organization is subject to more regulations than smaller businesses, especially when it comes to offering health benefits.
One requirement ALEs must follow is the affordability requirement that ensures your employer-sponsored health coverage is affordable to your full-time employees. Recently, the IRS made changes to these requirements, influencing how much employers need to contribute to their employees’ health coverage.
In this article, we’ll review what the affordability requirement is currently for 2021, how it’s changing in 2022, and what your options are if you’re found with an unaffordable plan.
What is the affordability requirement?
The Affordable Care Act’s (ACA) affordability requirement represents the highest percentage of an employee’s household income that they can be expected to pay for their monthly health insurance premium to be considered affordable. This is based on the least expensive employer-sponsored plan offered by an organization that meets minimum essential coverage (MEC).
This requirement was put in place to make sure that employees have access to affordable health coverage through their employer. In 2021, the affordability requirement was 9.83%. So that meant in order for a plan to be considered “affordable,” employees couldn’t be expected to pay more than 9.83% of their household income for their health coverage.
Employers have no way of knowing what their employees’ household income is, so “safe harbors” were put in place as benchmarks to help employers determine if their plans are affordable. The most commonly used safe harbor is the federal poverty level (FPL) safe harbor.
The FPL safe harbor gives employers a maximum premium amount for employee contributions for that year. For 2021, the FPL safe harbor dictates that an employee must pay no more than $104.53 a month in order for the health plan to be considered affordable.
What changes did the IRS make to the affordability requirement for 2022?
While the affordability requirement for 2021 was 9.83%, the IRS lowered it to 9.61% for 2022. That means employees are expected to contribute even less to their health coverage than before in order for an employer-sponsored plan to be considered affordable.
In addition, the FPL safe harbor amount decreased slightly from $104.53 a month for the employee’s maximum contribution to a monthly health insurance premium to $103.14. So as long as employees aren’t paying more than $103.14 a month for their premium, the plan is automatically considered affordable according to the ACA’s standards.
It’s important to note that if you have a non-calendar year plan, you will continue to use the 9.83% affordability threshold to determine affordability in 2022 until your new plan year starts.
That also means that non-calendar year plans won't be able to calculate the FPL safe harbor contribution limit for plan years beginning after Jan. 1, 2022 until the Department of Health and Human Services issues the 2022 FPL guidelines. This usually happens in January or February each year.
What does the IRS lowering the affordability requirement mean for my organization?
The IRS lowering the affordability requirement means that a health plan that was considered affordable in 2021 may not be in 2022. So even if you offer the same exact health plan in 2022 as you did in 2021, your plan could suddenly be unaffordable.
In order for your plan to be considered affordable in 2022, you’ll need to ensure that your plan doesn’t require any of your employees to pay more than 9.61% of their annual household income, (or $103.14 a month if you’re using the FPL safe harbor).
If you’re not using the FPL safe harbor, you can calculate affordability based on your employees 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, 9.61% of the monthly salary as of the first day of the 2022 coverage period.
What are my options if my health plan won’t be considered affordable any more?
If your current employer-sponsored health plan will no longer be considered affordable for your employees in 2022, you have two options, typically known as “play” or “pay”:
- Play: Increase your employer contributions so the plan is considered affordable with the new requirements.
- Pay: Potentially pay a penalty for not offering an affordable plan.
Let’s go over each in more detail.
If you choose to “play,” then you’ll adjust your contributions for the lowest-cost, self-only plan for the 2022 year until your employees are no longer paying more than 9.61% of their household income.
This is your best option if you can afford to increase your contributions and want to avoid any potential penalties for not offering affordable coverage.
If you choose to “pay,” then you’ll simply offer an unaffordable plan and pay the penalty for failing to offer your full-time workers with MEC that meets affordability and minimum value thresholds.
However, keep in mind that not all ALEs are subject to penalties for not offering affordable coverage. While ALE status is given to any organization that has 50 or more full-time equivalent employees, penalties are only given to organizations that have more than 30 full-time employees—not full-time equivalents.
So if you have 30 or fewer employees, you may choose to continue offering the plan you have, even if it’s considered unaffordable in 2022, without suffering any consequences.
However, if you do have more than 30 full-time employees, there are two penalties, also known as “shared-responsibility payments” enforced by the IRS:
- The Section 4980H(a) penalty, or the A penalty:
- This applies when an ALE doesn’t offer MEC to at least 95% 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.
- The 2021 A penalty is $225 per month ($2,700 annualized), multiplied by all full-time employees (minus the first 30). The IRS has yet to release figures for 2022.
- The Section 4980H(b) penalty, or the B penalty:
- This applies when an ALE offers coverage to at least 95% 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 2021 B penalty is $338.33 per month ($4,060 annualized) for each full-time employee that receives subsidized coverage on the ACA marketplace exchange. While the IRS has yet to release figures for 2022, they’re expected to go up.
For ALEs, paying attention to changes like these is essential to ensure you’re offering an affordable plan so you avoid hefty penalties. If you offer an HRA with PeopleKeep, we stay on top of all the relevant regulations that impact your health benefits to make sure your plan is always compliant.