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For the 2021 tax year, the ACA affordability threshold will increase to 9.83%. That means employees will likely have to contribute more towards their employer-sponsored healthcare.
Employers should note that the March 2021 enactment of the American Rescue Plan (ARP) temporarily reduces the affordability cap to no more than 8.5% of household income for the 2021 and 2022 tax years. This may result in the IRS lowering the corresponding IRC Section 4980H(b) penalty threshold to 8.5%, instead of the current 9.83% for 2021. The IRS has not currently issued any amendments to the regulations but may do so in the future.
The affordability threshold is used for determining whether or not an employer’s sponsored health coverage is affordable as required by the ACA’s Employer Mandate. Employers that offer coverage that is unaffordable could be subject to increased ACA penalty risk, particularly under the 4980H(b) penalty.
The higher ACA affordability percentage is used for calculating the maximum amount an employee can contribute towards a medical premium in order for the plan to be deemed “affordable,” which means that for the 2021 tax year, employees may need to contribute more to cover healthcare costs. This is because the required employee contribution to the health insurance premium cannot exceed an affordability threshold of 9.83% for 2021, which is the maximum percentage of the employee’s contribution for healthcare coverage to his/her household income.
Employers should note that failure to comply with the new ACA affordability determinations for the 2021 tax year could result in IRC 4980H(b) penalty assessments from the IRS as a part of the agency’s enforcement of the ACA’s Employer Mandate. That is a penalty of $338.33 a month or $4,060 annualized, for each employee who declines an offer of coverage and obtains a Premium Tax Credit (PTC) while purchasing health insurance on a state or federal exchange.
Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), organizations with 50 or more full-time employees and full-time-equivalent employees, are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is affordable for the employee, or be subject to) IRC Section 4980H penalties.
The Biden administration is currently making advancements to the ACA, and, for the first time in years, the healthcare law is being strengthened. States that historically are on the conservative side of healthcare policy are also coming around to some of the components of the ACA. In a rather surprising turn of events, both Oklahoma and Missouri passed legislation expanding Medicaid. States are also passing special enrollment periods, association health plans are being rolled back, and more Americans are qualifying for PTCs.
Employers, the ACA is here to stay and it’s best to get ahead of the curve when legislation for future reporting years is released. As you head into the second quarter of 2021, consider how your ACA plans may change as a result of the ACA affordability threshold possibly changing for the 2021 tax year.
Download the 2021 ACA Essential Guide for Employers to learn more about ACA affordability for the 2021 tax year and see what steps you can take to minimize IRS penalty risk.
If your organization has received IRS Letter 226J, download our white paper on Letter 226J to learn best practices for responding to the penalty notice.