Smart Benefits: ACA Affordability Threshold Increases for 2021

Smart Benefits: ACA Affordability Threshold Increases for 2021

The Affordable Care Act (ACA) benchmark for determining the affordability of employer-sponsored health coverage will rise to 9.83% of an employee’s household income for the 2021 plan year – a small increase from the 2020 level of 9.78%.

Under the ACA’s employer mandate, applicable large employers (ALEs) – generally those who had 50 or more full-time employees, including full-time equivalents, in the prior year – may be subject to a penalty if they do not offer affordable coverage that provides minimum value (MV) to full-time employees and their dependents.

Affordability Threshold

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For plan years beginning in 2021, the IRS has announced that coverage will be considered affordable if the employee’s required contribution for the lowest cost self-only health plan offered is 9.83% or less of his or her household income for the taxable year.  The IRS has created three safe harbors that employers may use in place of the employee’s household income to determine affordability:  W-2, Rate of Pay, and Federal Poverty Level.

For 2021 plans using the Federal Poverty Level safe harbor to determine affordability, an employee’s premium can’t exceed $104.52 per month (up from $101.79 in 2020).  In other words, employers offering a medical plan option in 2021 that costs employees no more than $104.52 per month for employee-only coverage will automatically meet the ACA affordability standard.
 

Employer Mandate Penalties

ALEs may be subject to a penalty for (1) failure to offer coverage to full-time employees and their dependents – the “part a” or “failure to offer” penalty; or (2) offering coverage that is not affordable or does not provide minimum value – the “part b” penalty.

Calculating the penalty for failure to offer coverage:

· In 2021: $2,700 per full-time employee, excluding the first 30 full-time employees

· Before the penalty will apply, at least one full-time employee must enroll in exchange coverage and must receive a premium tax subsidy for that coverage.

· Part-time employees are not included in the penalty calculation.

Calculating the penalty for offering coverage that is unaffordable or does not provide minimum value:

· In 2021:  $4,060 per full-time employee who receives a premium tax credit for exchange coverage

· Total penalty cannot exceed the amount that the employer would have owed if it had been liable for the failure to offer penalty.

 

Sam Slade is Managing Director, Employee Benefits, at The Hilb Group of New England, where he delivers consulting and brokerage services to local employers. He has extensive experience in all aspects of employee benefits, including underwriting, plan design, communications, compliance, and analytics, with a particular focus on alternative funding and self-insurance. Sam lives in South Kingstown with his wife and three sons.