The IRS has announced the new affordability requirement test percentage that group health plans must comply with to conform to the Affordable Care Act.
Starting in 2021, the cost of self-only group plans offered to workers by employers that are required to comply with the ACA, must not exceed 9.83% of each employee’s household income.
Under the ACA, “applicable large employers (ALEs)” — that is, those with 50 or more full-time workers — are required to provide health insurance that covers 10 essential benefits and that must be considered “affordable,” meaning that the employee’s share of premiums may not exceed a certain level (currently set at 9.78%). The affordability threshold must apply to the least expensive plan that an employer offers its workers.
The threshold was increased because premiums for health coverage increased at a greater rate than national income growth during 2020.
With this in mind, if you are an ALE you should consult with us to ensure that you offer at least one plan with premium contribution levels that will satisfy the new threshold.
Failing to offer a plan that meets the affordability requirement to 95% of your full-time employees can trigger penalties of $4,060 (for 2021) per full-time employee, minus the first 30. The penalty is triggered for each employee that declines non-compliant coverage and receives subsidized coverage on a public health insurance exchange.
Since most employers don’t know their employees’ household incomes, they can use three ways to satisfy the requirement by ensuring that the premium outlay for the cheapest plan won’t exceed 9.83% of:
- The employee’s W-2 wages, as reported in Box 1 (at the start of 2021).
- The employee’s rate of pay, which is the hourly wage rate multiplied by 130 hours per month (at the start of 2021).
- The individual federal poverty level, which is published by the Department of Health and Human Services in January of every year. If using this method, an employee’s premium contribution cannot be more than $104.52 per month.
The IRS also sets out-of-pocket maximum cost-sharing levels for every year. This limit covers plan deductibles, copayments and percentage-of-cost co-sharing payments. It does not cover premiums.
The new out-of-pocket limits for 2021 are as follows:
- Self-only plans — $8,550, up from $8,150 in 2020.
- Family plans — $17,100, up from $16,300 in 2020.
- Health savings account-qualified self-only plans — $7,000, up from $6,900 in 2020.
- HSA-qualified family plans — $14,000, up from $13,800 in 2020.