September 21, 2021
Decreased affordability percentage under Affordable Care Act could impact affordability of employer health plans
The Affordable Care Act (ACA) percentage used to calculate whether employer health care premiums are affordable has decreased for the first time since 2015. This could make some health plans fall out of ACA compliance and subject eligible employers to penalties.
IRC Section 4980H, which was added by the ACA, imposes excise taxes (commonly referred to as the employer mandate penalty) on applicable large employers (ALEs) if their employees receive premium tax credits for the purchase of their own health care coverage from one of the health care marketplace exchanges. Premium tax credits generally are available to individuals if they do not have affordable coverage from their employer and their household income does not exceed 400% of the federal poverty limit. The American Rescue Plan Act (ARPA), however, expanded the eligibility for premium tax credits to all income levels and provided that medical premiums for marketplace benchmark plans are capped at 8.5% of household income (until the end of the 2022 plan year) (The Build Back Better Act reconciliation bill has proposed making the premium tax credit expansion permanent). The excise tax is the "employer shared responsibility payment" (ESRP) for financing the health coverage of employees at income levels eligible for premium tax credits.
Employers can be responsible for payments for any given month when: (1) an ALE fails to offer full-time employees minimum essential coverage (MEC), and (2) ALEs offer full-time employees minimum essential coverage that is unaffordable. In both cases, an ESRP is only triggered when a full-time employee enrolls in coverage through a state-provided health care marketplace qualifying for premium support in the form of a premium tax credit (PTC) under IRC Section 36B.
ALEs have three "affordability safe harbors" to show their coverage is "affordable": (1) rate of pay (based on hourly rate or monthly salaried rate); (2) W-2 (based on gross income as reported in Box 1 on the form W-2); and (3) federal poverty level — FPL. If the amount an ALE charges an employee for self-only coverage satisfies an affordability safe harbor, the ALE will not be liable for an ESRP based on an unaffordable offer of coverage even if its employee qualifies for a PTC.
Affordability percentage decreases
An affordability percentage, indexed annually, applies to determine if an employer's self-only coverage meets the ACA's affordability requirements. In Revenue Procedure 2021-36, the indexing adjustment for plan years beginning on or after January 1, 2022, results in an affordability percentage of 9.61%. This is lower than the 9.83% affordability percentage for 2021. As a result, the affordability calculation may result in a lower allowable premium.
Employers that set their health insurance premiums based on ACA affordability should consider carefully reviewing their rates with their brokers and/or consultants. Because this affordability percentage decreased, an employer may end up with an unaffordable offer of coverage if 2022 health plan rates are the same as 2021. To maintain affordability, an employer may have to lower health plan rates in 2022.