Under the Affordable Care Act (ACA), Applicable Large Employers (ALEs), with 50 or more employees, must offer at least 95% of your workforce “affordable” health insurance. But did you know the rules governing this requirement have changed? Here’s what it means these dates to be ACA compliant and how FoxHire can take on the risks associated with not following these rules.
What is the Employer Health Plan Affordability Threshold?
If your company is large enough to be required to follow the ACA, you need to understand the affordability threshold. The law requires this threshold to cover at least 95% of your workforce insurance that has minimum essential coverage under the law for a cost that is affordable as it is defined by the government. Failing to follow these rules results in large fines by the IRS.
The ACA limits the amount any ALE can charge employees for even the least expensive health insurance (typically a self-only insurance policy). This limit is a percentage of the employee’s household income known as the affordability threshold. Each year the IRS announces that limit, and for 2021 it has increased. In 2020, the threshold was 9.78%. In 2021 it goes up to 9.83%.
How Will This Increase Impact Your Business?
What this means is that, under these new rules, the employer cannot charge an employee more than 9.83% of their household income for their insurance policy. This does not include coverage for higher-priced family plans, it just regulates the lower-cost self-only plans. But the logical question here is, “How will I know what the employee’s household income is?” It’s a good question, and the IRS developed three safe harbors for determining the affordability threshold:
- The employees form W-2 wages. But there is an issue here; how will you know W-2 wages for 2021 until you’ve processed the final paycheck from 2020? This didn’t give employers enough calculation time for negotiation with insurance papers. This is especially risky for workers whose hours fluctuate.
- Form W-2 does contain gross taxable wages without pretax deductions from 401(k) or an HSA.
- The insurance premium must stay consistent throughout the entire plan year, even if the employee’s hours reduce. So, if the employee earns less from you in 2021, you can’t reduce pay to offset the cost-sharing requirements.
With these mitigating factors in mind, however, it’s still simple to calculate the affordability amount. You can multiply the W-2 Box 1 wages by the new affordability percentage. Then divide that number by the number of months you pay the worker in a year. For example:
Box 1 wages – $40,000
x affordability – 9.83%
X 12 months of coverage
The employee’s monthly premium should be no more than $327.67.
Tip: Calculate this for your lowest-paid worker, and this will automatically apply to all other hourly employees.
Tip: You may use different safe harbor calculations for different employees as long as you remain compliant with the law.
Tip: It’s a good idea to analyze all of your options for different employees.
If this sounds overwhelmingly complicated, the truth is, it is. Administering this program so that you remain fully compliant with these ever-changing rules is risky. The penalties are steep for non-compliance. That’s where an EOR can help your business. Employers have a lot to deal with—from COVID to hiring, but an EOR can handle the risks associated with benefits administration. FoxHire is here to take on these challenges so you can focus on what’s important—growing your business. Call on us to find out how we can help.
