IRS Announces Employer Health Insurance Affordability Threshold for 2020
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 requirement to offer affordable health insurance to at least 95% of 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 the time, “affordable” was defined by the IRS to mean that the employee’s share of the single employee medical premium on the lowest cost plan offered by the employer could not exceed 9.5% of his household income.
Since 2014 that threshold has been adjusted for inflation on an annual basis and generally increased each year, other than the adjustments for the 2018 and 2020 tax years when the thresholds decrease slightly.
Each year I like to review for employers the compliance requirements in this regard and share any new information to help companies determine their plan contributions for the coming plan year. The following 8 questions and answers are designed to do that.
What is the affordability threshold for the 2019 tax year?
In February of 2020, via their annual 1095 reporting, large employers will have to report to the IRS the offer of “affordable” health insurance to full time employees in the 2019 tax year.
In view of that it’s important to know that 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:
- The employee’s W-2 wages
- The employee’s rate of pay
- 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 9.86% 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 penalty for not offering “affordable” health insurance?
In 2019, large employers will pay a non-taxable penalty of $3,750, annually for each employee who receives a Federal subsidy to assist with the purchase of affordable health insurance. In 2020 that penalty increases to $3,860 annually.
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 $3,750 on 10 employees ($3,750 x 10) for a total penalty of: $37,500
Should we let employees know whether or not the employer coverage meets the IRS definition of “affordable”?
Yes. In fact the Department of Labor requires large employers (those employing 50 full time equivalents (FTE) or more) to provide a Model Notice upon hire, notifying employees as to the affordability status of the company-offered medical insurance.
It is important employees understand that there may be a difference between the IRS definition of “affordable” and their own definition. I recommend employers begin their open enrollment meetings each year by educating employees as to the IRS definition of affordable coverage, and then following with affordability information specific to the employer-sponsored medical insurance.
Can employees receive a government subsidy even if the employer-sponsored coverage meets the IRS definition of “affordable”?
Yes. Without knowledge of the employer plan passing the “affordability” test employees may go looking for coverage at www.healthcare.gov and apply for a government subsidy citing the employer coverage as “unaffordable” based on the employee’s definition of “affordable” rather than the IRS definition.
One of the flaws in the current subsidy system is that subsidies are granted based on what the employee reports as to the availability of “affordable” employer-sponsored medical coverage whether it’s accurate or not.
It’s not until employers report the offer of affordable coverage on their 1095 forms each year that the IRS does a true reconciliation and determines whether or not the employee was actually justified in receiving the subsidy. If the IRS determines that the employer did in fact offer affordable medical coverage and the employee received a subsidy erroneously, then the employee is required to pay back that amount.
Employers should incorporate that subsidy payback explanation in their annual open enrollment communication for employee demographics where it makes sense to do so.
In establishing contributions for the 2020 plan year, how can employers ensure the company medical plan meets the definition of “affordable”?
To comply with affordability requirements for plan years beginning in the 2020 plan year, employers will want to ensure that the employees share of the single premium on the lowest cost plan offered does not exceed 9.78% of his annual income.
For questions or assistance with employee communication strategies, safe harbor design or other help in complying with IRS affordability requirements, contact me at jmorrow@employerbenefitsandadvice.com or 602-903-4047.