ACA Affordability Percentage and Calculations for 2020

Do you have at least 50 full-time employees? If so, you’re an Applicable Large Employer under the Affordable Care Act  — meaning you must offer “affordable” health insurance to your full-time employees, or risk penalties. But what exactly is “affordable” coverage? Each year, the IRS makes that determination, and the numbers are in for 2020.

ACA affordability threshold for 2020

A primary goal of the ACA is to make health insurance more affordable for workers. So, within the context of the ACA, “affordable” means that you (the ALE) cannot charge employees more than the legally established amount for health insurance. This threshold — adjusted yearly for inflation by the IRS — is a percentage of employees’ annual household income. For plan years starting in 2020, of employees’ household income, decreasing from 9.86% for plan years beginning in 2019. The affordability percentage applies to coverage for the lowest-priced self-only plan. Therefore, for 2020 plan year, the most you can charge employees for the lowest-priced self-only plan is 9.78% of their household income. Because employers don’t usually know their employees’ household income, the IRS created 3 safe harbors for determining affordability:

1. Form W-2 wages
2. Rate of pay
3. The federal poverty line

Form W-2 affordability test

Under the Form W-2 safe harbor, employees’ contribution for the lowest-priced self-only plan cannot exceed 9.78% (for 2020) of their W-2 Box 1 wages. Let’s say you offer an employee coverage for all 12 months of 2020, and their W-2 for that year reflects $30,000 in Box 1. Coverage is affordable if the employee does not pay more than $244.50 per month for the lowest-priced self-only plan. (Calculation = $30,000 x 9.78% / 12.) For employees hired at a later time during the year, affordability is based on their annual wages and how many months of coverage you offered them for the year. A drawback of the W-2 safe harbor is that it applies to W-2 wages for the current year, which you likely wouldn’t know until you’ve processed employees’ final pay for the year. This means you might not know whether coverage is affordable until the year ends. Another concern is that the W-2 safe harbor isn’t attached to minimum work hours. If an employee works fewer hours than anticipated or fluctuating hours, they might not earn enough to cover their share of the plan cost. For these reasons, the W-2 safe harbor is best for situations where employees work full, predictable schedules — such as 40 hours per week.

Rate of pay affordability test

With the rate of pay safe harbor, coverage is affordable if employees pay no more than 9.78% (for 2020) of their monthly rate of pay. To figure the monthly rate of pay, you must use 130 hours, regardless of how many hours the employee actually works. For example, an employee earning $17 per hour at the beginning of the 2020 plan year cannot be charged more than $216.14 per month for the lowest-priced self-only coverage. (Calculation: $17 x 130 x 9.78%.) For salaried employees, affordability is based on the monthly salary. In this case, you would multiply the monthly salary by 9.78%. You cannot use the rate of pay safe harbor for employees:

• Who receive tips or are paid solely by commissions
• Whose hourly rate or monthly salary have been reduced during the plan year

The rate of pay formula is ideal for employees who work fluctuating hours because affordability is based on 130 hours no matter how many hours they work.

Federal Poverty Level (FPL) affordability test

With the FPL safe harbor, coverage is affordable if the employee’s contribution does not exceed 9.78% (for 2020) of the federal poverty line for a household of one. Since FPL guidelines for the year aren’t published until January or February, you can use the FPL as of 6 months prior to the start of the plan year. So, if your plan year starts January 1, you would use the 2019 FPL for a household of one — which is $12,490 — to determine employees’ monthly premiums for 2020. (Calculation: $12,490 x 9.78% /12 = monthly premium of $101.79.) Of all three safe harbor methods, the FPL is the simplest to use because the contribution amount is the same for all employees. The FPL safe harbor also “simplifies ACA reporting and coding of Form 1095-C,” according to a report by Buck Global, an HR consulting firm. However, the FPL safe harbor takes a conservative view of employees’ income, and this tends to cause lower employee premiums and higher employer contribution.

Snapshot of safe harbor calculations

Considerations

• You can use one or more safe harbor methods for all employees, or for employees in a reasonable category as long as the method is consistently applied across all employees in the group. Examples of reasonable categories include salaried vs. hourly, geographic location, and specified job categories.
• The affordability percentage is exclusively tied to the lowest-priced self-only plan. So, if an employee chooses the highest-priced family plan, they’re responsible for whatever additional costs are associated with that plan — provided the lowest-cost self-only coverage available to them does not exceed 9.78% of their household income.

As an ALE, it’s crucial that you evaluate the impact of the 2020 affordability percentage on your benefits strategy, especially as it relates to health insurance. Also important is choosing the right safe harbor method for your business, since failure to comply with the affordability standard can result in penalties.