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For the 2021 tax year, the ACA affordability threshold will increase. That means employees will likely have to contribute more towards their employer-sponsored healthcare.
IRS Notice Rev Proc. 2020-36 states that beginning January 1, 2021, the ACA affordability threshold for the 2021 tax year will be 9.83%, up just a small portion from 2020’s 9.78%.
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 subjecting themselves to increased ACA penalty risk, particularly the 4980H(b) penalty.
The higher affordability percentage affects the maximum amount an employee can contribute towards the medical premium, which means that for the 2021 tax year, employees may need to contribute more to cover health care premiums. 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 affordability determinations for the 2021 tax year could result in IRC 4980H(b) penalties being assessed by the IRS as a part of the ACA’s Employer Mandate. That is a penalty of $4,060 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 Internal Revenue Code (IRC) Section 4980H penalties.
And so, another year begins to wind down and the ACA remains. States that historically err on the conservative side 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.
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 final quarter of 2020, consider how your ACA plans will change as a result of the ACA affordability threshold changing for the 2021 tax year.
With our ACA Complete solution, the burden of complying with the healthcare law is almost completely removed. Contact us to learn how.