Safe Harbor Affordability Changes
The IRS recently issued Revenue Procedure 2018-34 , which increased the safe harbor affordability percentages under the Affordable Care Act (ACA) for the employee premium contributions for plan years beginning in 2019. The new safe harbor affordability percentage is 9.86% which is an increase from the 2018 affordability percentage of 9.56%. This is the largest increase since the mandated pay or play rules took effect.
Although the revenue procedure above refers only to eligibility thresholds for the health exchanges, in a previous IRS Notice 2015-87 the IRS noted that the safe harbor affordability percentages would be indexed in the same manner.
The safe harbor affordability percentages are an important piece in any Applicable Large Employers (ALE) strategy in offering health insurance as mandated by the Affordable Care Act (ACA). The safe harbor affordability percentages determine if the health insurance offered by the employer is affordable to the employee based on their income level. The test is based on the employee share of the premium for employee only coverage under the lowest cost plan that the employee is eligible to enroll in.
The three safe harbors to measure affordability are:
Form W2 – using income from Box 1 of the W2
Rate of Pay – based on hourly rate of pay multiplied by hours worked
Federal Poverty Level (FPL)- based on an income level set in the previous year.
For 2018 – using the 2017 federal poverty level of $12,060 and the 9.56% affordability percentage, the maximum monthly premium would be $96.08.
For 2019 – using the 2018 federal poverty level of $12,140 and the 9.86% affordability percentage, the maximum monthly premium would be $99.75
There are advantages to using the FPL safe harbor method as it streamlines what information has to be reported on the 1095C and the 1094C. This is considered to be a qualifying offer.
All three of these calculations use the safe harbor affordability percentage in making that determination. Why is that important? It is important as if the premiums charged by the employer are not affordable to the employee, and the employee enrolls in a plan on the health exchange and receives a premium subsidy, the employer can face a penalty.
Employers are just now starting to receive the IRS Employer Shared Responsibility Payment letters (aka: penalty letters). There are two types of penalties that can apply.
§4980(a) penalty (referred to as the “A” penalty) is applied where the ALE fails to offer minimum essential coverage to at least 95% of full time employees in any calendar month. The “A” penalty for 2018 is $193.33 per month ($2,320 annualized) and is triggered if just ONE full time employee enrolls in coverage on a health exchange and is provided a premium subsidy, multiplied by all full time employees for that month. The A penalty is not affected by the affordability of the health insurance premiums.
§4980(b) penalty (referred to as the “B” penalty) can apply if the employer is not subject to the “A” penalty. The “B” penalty applies for each full time employee who was not offered minimum