IRS Announces Affordability Increase for Employers in 2019

Written by Joanna Morrow

Joanna Morrow, Principal and Founder of Employer Benefits & Advice, is an employer consultant and advocate who has worked in the employee benefits industry for over two decades. She works diligently to help employers overcome obstacles in their business by sharing her expertise in Human Resources, Benefits & Compensation, Process Mapping, Risk Management and ERISA/DOL/IRS compliance. She is a licensed life and health insurance professional in the State of Arizona and is an active member of the National Association of Health Underwriters (NAHU).

IRS Announces Affordability Increase for Employers in 2019

If you’re a large employer, meaning one who employs more than 50 full time equivalents, then by now you are very familiar with the laws surrounding the IRS requirement to offer affordable health insurance to full time employees.

Beginning in 2014, the IRS issued a mandate requiring all large employers to offer “affordable” health insurance to their full time employees. At that time, “affordable” was defined as an amount not to exceed 9.5% of the employee’s household income. In other words, the employee’s share of the single employee health insurance premium on the lowest cost plan your company offered could not exceed 9.5% of his household income.

On May 21, 2018, the IRS announced another increase to that threshold.

For plan years beginning in 2019, employer-sponsored coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed:

  • 9.86% of the employee’s household income for the year, for purposes of both the pay or play rules and premium tax credit eligibility

Below is a chart to show the annual increase in the affordability threshold since it was first introduced in 2014.

Here are a few other common questions and answers relative to the affordability test:

How am I supposed to know the household incomes of my employees?

Because employers are not privy to “household incomes”, the IRS created three (3) safe harbors in which any of the following could be used in place of household income when calculating affordability:

  1. The employee’s W-2 wages
  2. The employee’s rate of pay
  3. The individual Federal Poverty Level (FPL)

In understanding how each safe harbor is different and which one is the best fit for your company, consult an employee benefits expert.

What if I offer more than one health insurance option to employees?

The ACA requires only that the employee’s share of the single premium on the lowest cost health plan offered cannot exceed 9.5% of his annual income (currently).

That means that employers who offer more than one health insurance option can base their affordability test off of the lowest cost plan, provided that plan is deemed as including all of the Essential Health Benefits.

What happens if I offer coverage that fails the affordability test?

Large employers who fail to offer affordable health insurance, including all of the essential health benefits, risk a penalty in the event an employee buys coverage via the government-sponsored marketplace and qualifies for a subsidy. The federal government designed it so that the employer fines would help to fund the subsidies.

How much is the fine for not offering “affordable” health insurance?

In 2018, the maximum annual penalty for large employers who do not offer affordable health insurance is $3,480 for any employee receiving a government subsidy for health insurance.

Example:

  • Employer: Employs 500 employees and offers health insurance that does not meet the IRS definition of “affordable”
  • Trigger: 10 employees purchase health insurance through www.healthcare.gov and qualify for a Federal subsidy
  • Result: Employer is penalized $3,480 on 10 employees ($3,480 x 10) for a total penalty of: $34,800

How much is the fine for not offering health insurance at all?

In 2018, if a large employer chooses not to offer minimum essential coverage to his employees, the penalty is $2,320 per full-time employee, excluding the first 30 employees.

Example:

  • Employer: Employs 500 employees and chooses to not offer health insurance
  • Trigger: One employee purchases health insurance through www.healthcare.gov and qualifies for a Federal subsidy
  • Result: Employer is penalized $2,320 on 470 employees (500 – 30) for a total penalty of: $1,090,400

What’s the best strategy for employers?

The Affordable Care Act’s (ACA) employer mandate created the biggest problems for those large employers who prior to 2014 did not offer health insurance to all full time employees, or didn’t offer affordable coverage, or both. When determining the best strategy, employers need to consider their workforce demographics.

For example, as scary as the words “IRS penalty” are it’s not always necessary to make your plan “affordable”. You have to leverage the reality of your workforce. Ask yourself how many employees will actually go and purchase coverage on their own? How many employees are eligible for on Medicaid or AHCCCS in Arizona? If the risk of a large number of employees buying health insurance on their own is small, then so is the employer’s risk for the affordability penalty.

Can I limit the health insurance offering to my managers and executives?

Yes. Management carve-out plans are still a viable strategy for large employers looking to curb health insurance costs. There are some new rules under the ACA that an employer needs to follow depending on whether the medical plan is fully insured or self-funded, but it is definitely doable and in certain industries a number of companies are returning to that model.

Before limiting your benefit offering be sure to consult with an employee benefits expert to ensure compliance with all of the rules.

For questions or to explore this strategy further, feel free to contact me at [email protected] or 602-903-4047.