What Constitutes “Affordable” for Employees Under the ACA?
The concept of “affordability” for a given item can be unclear and be subject to much interpretation. In the context of the Affordable Care Act (ACA), affordability is defined precisely and numerically. This is so employers can ensure the health plans they offer to employees meet the criteria for ACA affordability, thus avoiding penalties and audits.
Companies with 50 or more full-time employees must offer health coverage to “substantially all” of their full-time employees and dependents. If that coverage doesn’t meet minimum defined coverage levels, or if it is determined to be unaffordable, an employer-shared-responsibility penalty may take effect.
How affordability is defined in 2020 under the ACA
Under the ACA, in 2020, health plans are considered ACA affordable if the employee’s required contribution for individual coverage does not exceed 9.78% of the employee’s household income for the year. “Household income” is the modified adjusted gross income of the employee and any spouse or dependents he or she may have.” The affordability test does not apply when considering additional costs to employees for family (rather than individual) coverage.
Some employers offer multiple health insurance options from which employees may choose. In this scenario, the ACA affordability test applies only to the lowest-cost option that satisfies minimum value requirements.
How to determine ACA affordability
Since employers typically don’t know employees’ household incomes, companies affected by the employer mandate have three options to determine ACA affordability. As long as the employer offers 95% of its full-time employees and their dependents the opportunity to have minimum essential coverage under a plan that meets minimum value requirements, the employer can use one of three affordability calculations (“safe harbors”) to ensure the plan meets requirements. The safe harbors must be applied consistently and uniformly to employees in different categories.
The Federal Poverty Line safe harbor
The Federal Poverty Line (FPL) calculation is the simplest and easiest to use. This is done by calculating 9.78% of the one-person household federal poverty figure for 2020 ($12,490) divide that by 12 (to get the monthly employee premium), which would be $101.79. If you offer a plan that costs less than that example for employee-only coverage, your company meets ACA affordability criteria.
The rate of pay safe harbor
To calculate ACA affordability based on employee compensation, multiply an employee’s monthly salary by 9.78%. This gives the maximum amount you can charge that employee this year for qualifying coverage. For hourly employees, assuming 130 work hours in a typical month. Calculating affordability is based on the lower overall figure when the two following options are calculated:
- Employee hourly rate of pay on the first day of the plan year times 130 work hours per month, multiplied by 9.78%
- Employee’s lowest hourly pay rate during the calendar month times 130 work hours per month, multiplied by 9.78%
The W-2 form safe harbor
An employee’s W-2 wages for an entire or part of a calendar year may also be used to calculate minimum ACA affordable coverage. Simply take an employee’s W-2 wages for the month and multiply by 0.0978 (in other words, 9.78%). That number defines the monthly maximum the company could take from the employee’s wages each month to pay for a minimally qualifying health plan. For example, an employee’s W-2 showed monthly pay of $1,500, then:
1500 × 0.0978 = $146.70
To meet affordability requirements under the W-2 calculation, an employer would need to offer one plan for which the employee’s monthly contribution was no more than $146.70.
Determining which ACA affordability calculation to use
Calculating affordability can be complicated and mistakes can result in penalties and fines. Tango Health provides an ACA compliance solution that applies calculations to determine affordability of coverage via an easy-to-understand dashboard display. This software solution saves substantial time and resources for large, complex organizations or organizations with numerous employee classifications.
We can help
Originally published March 25, 2016; updated Dec. 18, 2019
Categorized in: ACA