With the 2021 ACA reporting season coming to an end later this month, employers should turn their attention to ACA compliance for the 2022 tax year. A key component of that requires calculating ACA affordability.
The ACA affordability threshold for the 2022 tax year is 9.61%. This is a slight decrease from the 2021 tax year, which set ACA affordability at 9.83%.
The lower affordability percentage affects the maximum amount an employee can contribute towards a monthly medical premium. This means that employers may need to contribute more to cover health care premiums for employees.
This is because the required employee contribution to the health insurance premium cannot exceed an affordability threshold of 9.61% for 2022, the maximum percentage of the employee’s contribution for healthcare coverage to his/her household income. Organizations must support any premium costs above that level to ensure ACA affordability.
Here’s an example of how to calculate affordability this year.
Jonny Doe works at a local hardware store and earns $15 an hour. To be considered ACA full-time, Jonny must work an average of 130 hours a month. Jonny’s employer leverages the Rate of Pay Safe Harbor to calculate ACA affordability for Johnny and the rest of its staff. The hardware store cannot charge Jonny more than $187.40 a month to satisfy ACA affordability for the 2022 tax year.
Here’s the calculation:
$15/hour x 130 hours = $1,950 x 9.61% = $187.40
ACA affordability is determined by the IRS, and the 2022 tax year threshold is outlined in IRS Revenue Procedure 2021-36. Employers offering health insurance to their workers this year will need to be sure that contribution amounts are no more than 9.61% of each employee’s household income. This applies to self-only coverage and is critical for meeting the affordability component of the ACA’s Employer Mandate.
Under the ACA’s Employer Mandate, Applicable Large Employers, or employers with 50 or more full-time and full-time equivalent employees must:
- Offer Minimum Essential Coverage, that meets Minimum Value, to at least 95% of their full-time employees and their dependents; and
- Ensure that the coverage is affordable by using one of the IRS-approved safe harbor methods for calculating affordability.
Failing to offer affordable ACA coverage could result in IRS penalties under Section 4980H(b). These penalties are issued via Letter 226J. If you’ve received one, contact us to have your penalty reduced or eliminated.
For the 2022 tax year, the penalty amounts for offering unaffordable ACA coverage are steep. The penalty amount per employee is $343.33 a month or $4,120 for the year.
With the IRS ramping up enforcement of the ACA’s Employer Mandate, now is the time to ensure you’re in compliance with the now 12-year-old healthcare law.
If you need assistance setting up your ACA affordability calculations for the 2022 tax year, download the Safe Harbor Playbook for Calculating ACA Affordability below.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.