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Calculating ACA Affordability in 2021

Posted on October 27th, 2020

The Employer Mandate guidelines state that coverage is affordable when an employee has to pay no more than 9.5% of their household income (inflation-adjusted to 9.83% for the 2021 plan year) for self-only coverage which is offered, but which employers know the household income of an employee? As a result, there are three alternative methods that an employer can rely upon when determining if the coverage they offer is affordable. These methods are explained below and some general examples of how to apply each method have also been provided. Assume in each example that the employer has a calendar plan year for 2021.

W-2 Safe Harbor Method

Coverage is deemed affordable if the employee is charged no more than 9.83% of current year wages according to Box 1 of their W-2. Please note that this method is relatively simple to apply, but it uses current year wages which will not be known until the 2021 year is over. That means an employer may not know if coverage is affordable until after the conclusion of the year.

Example 1

Joe is employed at XYZ Inc. for the entire year and is offered coverage for all 12 months. His wages according to Box 1 of his W-2 are $28,000. XYZ Inc. will be considered to offer affordable coverage provided Joe is not charged more than $229.37 per month for coverage.

The formula is ($28,000 x .0983)/12 = $229.37.

Example 2

Joe is hired by XYZ Inc. on May 15, 2021 and is offered coverage after his waiting period on August 1, 2021. His W-2 wages according to Box 1 of his W-2 are $20,000. In this scenario, an adjustment should be made to the W-2 wages used in the affordability calculation since Joe was not employed for the entire year and he was subject to a waiting period before coverage was offered.

Formula = W-2 wages * (calendar months offered coverage/months of employment) = $20,000 * (5/8)= $12,500

The W-2 wages used in the affordability calculation are adjusted to $12,500 for the 5 months Joe is offered coverage. XYZ Inc. will be considered to offer affordable coverage provided Joe is not charged more than $245.75 per month for coverage. The formula is ($12,500 x .0983)/5 = $245.75.

Rate of Pay Safe Harbor Method

Coverage is deemed affordable if the employee is charged no more than 9.83% of their monthly rate of pay at the start of the coverage period. Always use 130 hours when determining the monthly rate of pay for hourly employees regardless of actual hours worked. For salaried employees, affordability is tied to the monthly salary at the start of the coverage period. The rate of pay method should not be used for employees who receive wages by virtue of tips or employees who are paid solely by commissions.

Example 1

Kathy works for XYZ Inc. and makes $15 per hour as of the start of the plan year. XYZ Inc. will be considered to offer affordable coverage provided Kathy is not charged more than $191.69 per month for coverage.

The formula is ($15 x 130) x .0983 = $191.69.

Example 2

Kathy works for XYZ Inc. and has a $30,000 annual salary as of the start of the plan year. Kathy’s pro-rated monthly salary is $2,500 ($30,000 / 12 = $2,500). XYZ Inc. will be considered to offer affordable coverage provided Kathy is not charged more than $245.75 per month for coverage.

The formula is $2,500 x .0983 = $245.75.

 

Federal Poverty Level (FPL) Safe Harbor Method

Coverage is deemed affordable if the employee is charged no more than 9.83% of the most recently published mainland FPL for a household of one. Example. The most recently published mainland FPL for a household of one is $12,760. XYZ Inc. will be considered to offer affordable coverage to employees who are not charged more than $104.53 per month for coverage.

The formula is ($12,760 x .0983)/12 = $104.53.

Please note the above information applies for plan years in 2021 that start prior to July 1, 2021. An adjusted mainland FPL income amount will be made available and is to be used in the affordability calculation for plan years beginning on or after July 1, 2021.

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