Under the United States’ Affordable Care Act’s (ACA) Pay or Play mandate employers may face part (b) penalties if the coverage they offer is unaffordable. Coverage is “unaffordable” when employees are asked to pay more than 9.5% of their modified adjusted gross household income for the employer’s lowest cost minimum value plan at the employee-only tier of coverage. This percentage is indexed annually and was 9.56% for 2018. Recently released guidance increases it to 9.86% for 2019. This percentage is also used for ACA affordability safe harbors.
As a reminder, plans can virtually eliminate their Part (b) penalty risk by setting cost sharing at one of three affordability safe harbors:
- W-2 safe harbor (cost of coverage does not exceed 9.86% of the employee’s W-2 wages for 2019)
- Rate of pay safe harbor (cost of coverage in 2019 does not exceed 9.86% of the employee’s rate of pay x 130 hours per month, regardless of how many hours are actually worked) or
- Federal Poverty Level safe harbor (cost of coverage does not exceed 9.86% of the Federal Poverty Level in effect 6 months prior to the plan year).
For additional information on the use of a safe harbor (including the benefits and drawbacks of each), the impact of a state’s Medicaid expansion status, and how to estimate affordability based on an employer’s lowest wage earners listen to Alliant’s Podcast, Pay or Play Penalties and IRS Activities.
Many thanks to our US Partner Alliant Employee Benefits for providing this article.