Safe Harbors Despite Decreased 2020 ACA Affordability Threshold

by Prof. Robert Bloink and Prof. William H. Byrnes

By this point, most employers understand their obligations with respect to providing employees with health coverage that provides minimum value and that is deemed “affordable” under the Affordable Care Act (ACA) rules. Despite this, the IRS has released a new affordability percentage threshold level for 2020 that is actually lower than that which applied for 2019—creating potential complications that employers must understand in order to avoid the substantial penalties that are still tied to the employer mandate. These employers must carefully evaluate the health coverage options offered to employees as well as any potential safe harbors that might help them avoid harsh ACA penalties for the upcoming 2020 tax year—and could, in some circumstances, even allow employers to keep premium levels relatively steady despite the decreased affordability threshold.

2020 ACA Affordability Thresholds

The inflation-updated threshold for determining whether employer-sponsored health coverage is affordable in 2020 will decrease to 9.78 percent (down from 9.86 percent in 2019). This means that if an employee is required to contribute more than9.78 percentof his or her household income toward self-only health insurance in 2020 under the employer’s plan, he or she may be eligible for premium tax credit assistance.

In turn, once at least one employee of an applicable large employer is eligible for the premium tax credit and purchases health coverage via the health insurance marketplace, the potential for penalties under the employer mandate is triggered (note that while the individual mandate has been reduced to zero, the employer mandate remained unchanged by tax reform).

However, affordability is based upon the lowest cost option offered by the employer, so long as that plan meets ACA requirements as to minimum essential health coverage. Further, the affordability test is not impacted by the fact that the employee may choose higher cost family coverage offered by the employer.

To prevent application of the penalties, therefore, some employers may wish to consider offering multiple health plan options, at least one of which requires employee contributions that will fall below the annual affordability threshold range. Employers may also turn to one of several safe harbor provisions designed to help employers avoid the ACA penalties, especially in situations where the employer is unlikely to know the employee’s full household income level.

Potential Safe Harbor Relief

Three primary safe harbors exist to allow employers to escape ACA penalties based upon affordability, in recognition of the fact that employers often will not have access to the employee’s household income levels—for example, income from a second job or a spouse’s income could change the calculus and is not controllable by the employer.

Because of this, when determining the employee’s required contribution toward health coverage, the employer is able to base its affordability calculations on the employee’s W wages for the calendar year (paid by the employer alone) or the employee’s hourly pay multiplied by 130 hours per month (calculated as of the first day of the plan year). In the alternative, the employer can use the individual federal poverty line safe harbor, using the federal poverty line as of six months prior to the start of the plan year.

To use the federal poverty line safe harbor, the employer bases the employee’s contribution on 9.78 percent of the prior year’s poverty line for one person ($12,490), and divides that figure by 12 to arrive at the highest permissible monthly rate for 2020 ($101.79 under the safe harbor). While the use of this safe harbor can significantly reduce the premium cost that employers may charge employees with higher household income, it does provide a degree of certainty for employers concerned about fluctuations in the affordability threshold.

Conclusion

Although the affordability threshold declined from 2019 to 2020, this does not automatically mean that all employers must reduce employee contributions for health coverage. For some employers, safe harbor options may permit contribution levels that remain the same or may even increase slightly —but every applicable large employer should take the time to evaluate the affordability of their health coverage options to avoid a potentially severe ACA penalty surprise.