On May 5, 2017, the Internal Revenue Service (IRS) issued Revenue Procedure 2017-36 to index the contribution percentages in 2018 for purposes of determining affordability of an employer’s plan under the Affordable Care Act (ACA). For plan years beginning in 2018, employer-sponsored coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed:
- 9.56 percent of the employee’s household income for the year, for purposes of both the pay or play rules and premium tax credit eligibility; and
- 8.05 percent of the employee’s household income for the year, for purposes of an individual mandate exemption (adjusted under separate guidance).
These updated affordability percentages are effective for taxable years and plan years beginning Jan. 1, 2018. This is the first time since these rules were implemented that the affordability contribution percentages have been reduced. As a result, some employers may need to reduce their employee contributions for 2018 to meet the adjusted percentage.
Overview of the Affordability Requirement
Under the ACA, the affordability of an employer’s plan may be assessed in the following three contexts:
- The employer shared responsibility penalty for applicable large employers (also known as the pay or play rules or employer mandate);
- An exemption from the individual mandate tax penalty for individuals who fail to obtain health coverage; and
- The premium tax credit for low-income individuals to purchase health coverage through an Exchange.
Although all of these provisions involve an affordability determination, the test for determining a plan’s affordability varies for each provision.
Affordable Employer-sponsored Coverage
Under the ACA, employees (and their family members) who are eligible for coverage under an affordable employer-sponsored plan are generally not eligible for the premium tax credit. This is significant because the ACA’s employer shared responsibility penalty for applicable large employers (ALEs) is triggered when a full-time employee receives a premium tax credit for coverage under an Exchange.
To determine an employee’s eligibility for a tax credit, the ACA provides that employer-sponsored coverage is considered affordable if the employee’s required contribution for self-only coverage does not exceed 9.5 percent of the employee’s household income for the tax year. After 2014, this required contribution percentage is adjusted annually to reflect the excess of the rate of premium growth.
Employer Shared Responsibility Rules
The ACA’s employer shared responsibility or “pay or play” rules require ALEs to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty.
The employer shared responsibility rules generally determine affordability of employer-sponsored coverage by reference to the rules for determining premium tax credit eligibility. Therefore, for 2014, employer-sponsored coverage was considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage did not exceed 9.5 percent of the employee’s household income for the tax year.
This affordability contribution percentage was adjusted to:
- 56 percent for 2015 plan years;
- 66 percent for 2016 plan years; and
- 69 percent for 2017 plan years.
For 2018, Rev. Proc. 17-36 decreases the affordability contribution percentage to 9.56 percent. This means that employer-sponsored coverage will be considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage does not exceed 9.56 percent of the employee’s household income for the tax year.
Employers may use an affordability safe harbor to measure affordability of their coverage. The three safe harbors measure affordability based on Form W-2 wages from that employer, the employee’s rate of pay or the federal poverty line (FPL) for a single individual. IRS Notice 2015-87 confirmed that ALEs using an affordability safe harbor may rely on the adjusted affordability contribution percentages for 2015 and future years.
The affordability test applies only to the portion of the annual premiums for self-only coverage, and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.
Individual Mandate Exemption
The ACA’s individual mandate requires most individuals to obtain acceptable health coverage for themselves and their family members or pay a penalty. However, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption:
- Coverage is affordable for an employee if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income (as adjusted).
- Coverage is affordable for family members if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income (as adjusted).
This affordability contribution percentage was adjusted to 8.05 percent for plan years beginning in 2015, 8.13 percent for plan years beginning in 2016, and 8.16 percent for plan years beginning in 2017. In the 2018 Notice of Benefit and Payment Parameters, the Department of Health and Human Services reduced this required contribution percentage to 8.05 percent for plan years beginning in 2018.
Premium Tax Credit
The ACA provides premium tax credits to help low-income individuals and families afford health insurance purchased through an Exchange. The amount of a taxpayer’s premium tax credit is determined based on the amount the individual should be able to pay for premiums (expected contribution).
The expected contribution is calculated as a percentage of the taxpayer’s household income, based on the federal poverty level (FPL). This percentage increases as the taxpayer’s household income increases, and is indexed each year after 2014, as follows: