The IRS issued Revenue Procedure 2018-34 on May 21, 2018. This action is intended to determine the affordability of an employer’s plan under the Affordable Care Act (ACA) by indexing the contribution percentages in 2019.
So what does this do? For plan years beginning in 2019, employer sponsored coverage will be considered affordable if the employee’s required contribution for self only coverage does not exceed 9.86% of the employee’s household income for the year, for purposes of both the pay or play rules and premium tax credit eligibility. Additionally, for purposes of an individual mandate exemption, the required contribution can’t exceed 8.3% of the employee’s yearly household income.
These affordability percentage updates apply to taxable years and plan years beginning January 1, 2019. It’s worth noting that this is an increase from the affordability percentages set for 2018, which had been a household income percentage of 9.56%. This could mean that some employers have additional flexibility with respect to their employee contributions for 2019.
Still have questions? Let’s break down the ACA.
The Affordability Requirement
The affordability of an employer’s plan can be assessed in three different contexts, under the ACA:
- “Pay or Play” rules, also known as employer mandate. This is the employer shared responsibility penalty for applicable large employers
- Exemptions from the individual mandate tax penalty for individuals who failed to obtain health coverage
- The premium tax credit for low-income individuals to purchase health coverage through an Exchange
Affordable Employer-Sponsored Coverage
Employees and their family members who are eligible for coverage under an affordable employee-sponsored plan are generally not eligible for the premium tax credit. Why is that important? Because the ACA’s employer shared responsibility penalty is triggered when a full-time employee receives a premium tax credit for coverage under an Exchange.
Employer Shared Responsibility Rules
Employer shared responsibility (aka pay or play) rules require Applicable Large Employers (ALEs) to offer affordable, minimum value health coverage to their full-time employees and their dependents.
The affordability of health coverage is the key factor in determining who is subject to these penalties. These rules generally determine affordability of employer-sponsored coverage by reference to the rules for determining premium tax credit eligibility.
For 2019, Rev. Proc. 18-34 increases the affordability percentage to 9.86 percent.
Employers have three options for an affordability safe harbor that they may utilize to measure the affordability of their coverage. These safe harbors are:
- Form W-2 wages
- The employee’s rate of pay
- The federal poverty line for a single individual
ALEs using an affordability safe harbor may rely on the adjusted affordability contribution percentages for 2015 and future years.
The affordability test only applies to annual premiums for self-only coverage and doesn’t include the additional costs for family coverage. Additionally, an employer that offers multiple coverage options is subject to the lowest-cost option that also satisfies the minimum value requirement.
Individual Mandate Exemption
The individual mandate under the ACA formerly required most individuals to obtain acceptable health coverage for themselves and their dependent children or pay a penalty. Individuals who lack access to affordable minimum essential coverage are exempt. For the purposes of the exemption, coverage is only considered affordable if the required contribution for the lower-cost, self-only coverage does not exceed 8.3% of the household income. With respect to family members, coverage is affordable, if the required contribution for lowest-cost family coverage also does not exceed 8.3% of the household income.
The Tax Cuts and Jobs Act reduced the ACA’s individual mandate penalty to zero, effective beginning in 2019. This means that individuals will no longer be penalized for failing to obtain acceptable health coverage, starting in 2019. An individual qualifies for this affordability exemption if he or she must pay more than 8.3% of their household income for minimum essential coverage.
Premium Tax Credit
The ACA provides premium tax credits in order to help low-income individuals and families afford health insurance. Determining the amount of a taxpayer’s premium tax credit is based on the amount of the individuals expected contribution. This value is calculated as a percentage of the taxpayer’s household income.
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