The IRS has announced a nearly 0.1% decrease in the Affordable Care Act’s (ACA) employer mandate affordability threshold for 2020. A minimum value healthcare coverage offer to an employee won’t be considered “affordable” in 2020 unless the employee’s share of the premium for self-only coverage is no more than 9.78% of the employee’s household income, down from 9.86% for 2019.

Why affordability matters

Affordability is important because it is a factor that may cause an employer to be subject to penalty under the ACA.  Employers must satisfy the following two requirements to avoid all risk of penalty under the employer mandate (if any of their employees considered “full-time” under the ACA receive a federal subsidy).

First, the employers must offer at least 95% of their ACA full-time employees (and employees’ children) at least some health insurance. The employee’s share of the cost for  that coverage is irrelevant.

Second, the coverage offer to these ACA full-time employees, at least for self-only coverage, must be both “minimum value” (i.e., coverage designed to pay at least 60 percent of expected medical expenses) and affordable. To be affordable, the employee’s share of the premium cost for self-only coverage must not exceed 9.5% of the employee’s household income.  As discussed in this blog, this percentage is adjusted annually for inflation.

Lockton comment: Because employers will rarely know an employee’s household income (essentially, adjusted gross income), the IRS offers employers three affordability safe harbors. Use of a safe harbor is subject to specific IRS rules. The employer’s healthcare coverage offer will be deemed affordable if it requires the employee to pay, for self-only coverage, no more than the applicable percentage (for 2020, 9.78%) of one of the following:

• The employee’s W-2 pay.
• The federal poverty level.
• The employee’s rate of pay times a given number of hours.

Next year employers may be required to charge employees a bit less for self-only health coverage if in 2019 the employer was charging between 9.78 and 9.86 percent of the employee’s household income for that coverage.

Lockton comment: An unaffordable offer means the employee could decline the employer’s offer and potentially obtain a federally-subsidized insurance policy in an online ACA marketplace, triggering a tax penalty on the employer.