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The Trump Administration has proposed changing the methodology for calculating the federal poverty level (FPL). As expected, it could have serious implications for the Affordable Care Act.
The new methodology calculates the poverty level based on the Chained Consumer Price Index for All Urban Consumers. Currently the federal poverty level calculates the federal poverty level on the basis of the Consumer Price Index for All Urban Consumers. The new methodology calculates the cost of living at a lower rate than the current methodology.
According to a post by the University of California, Berkeley Labor Center, “The Congressional Budget Office projects that the cost of living measured by the Consumer Price Index for All Urban Consumers will increase by 27%, but the cost of living measured by the Chained Consumer Price Index for All Urban Consumers will increase by only 24.5%.”
While the percentage difference seems minimal, the difference between the two methodologies makes a substantial impact on Americans’ cost of living. The slowed rate would especially impact Americans’ health care.
The Center on Budget and Policy Priorities stated in a post that “more than 250,000 adults would lose coverage through the Affordable Care Act’s (ACA) Medicaid expansion, and some very low-income parents covered through Medicaid in states that haven’t adopted the expansion would lose coverage as well.” Additionally, over 150,000 low-income seniors would also lose eligibility for Medicare.
The Center on Budget and Policy Priorities also states that Americans would receive lower Premium Tax Credit amounts, resulting in higher monthly premiums. With higher premiums, fewer individuals will be able to afford their health insurance on the state and federal health exchanges. As a result, it’s possible that more individuals will turn to employer sponsored coverage. Already, nearly 50% of Americans receive health coverage from their employer.
Employers should note that the FPL plays a big role in determining ACA affordability. Employers indicate on Line 16 of Form 1095-C if the coverage offered to an employee is affordable. One of the indicators is the FPL, a commonly used safe harbor that demonstrates that the coverage is affordable and is below the FPL for a specific reporting year. You can read more on the FPL Safe Harbor and other safe harbors by clicking here.
Heading into the 2020 tax year, Employers that use the FPL Safe Harbor could be facing a double whammy. The IRS has already announced that the affordability percentage is dropping from 9.86% to 9.78%. This means, to meet the FPL Safe Harbor, employers will need to contribute a higher percentage towards medical premiums for employees. Previously, employers could count on a certain amount of relief in meeting the FPL Safe Harbor contribution requirements due to the year over year increases in the FPL itself. If the new methodology for how the FPL is calculated is implemented, employers will receive less relief and likely need to contribute even more towards employee health coverage.
Employers should be especially careful when setting up their health contribution rate structures for the new year. As a reminder, if employers fail to meet the affordability requirement under the ACA’s Employer Mandate, they can be subject to ACA penalties under IRC section 4980H(b).
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.
The IRS is currently issuing Letters 226J for the 2017 tax year to employers identified as having failed to comply with the ACA’s Employer Mandate. Organizations should have an ACA Penalty Risk Assessment performed to learn their potential penalty exposure with the IRS.
If you’ve already received Letter 226J penalty notice, learn how to respond here.
Contact us by December 20 to ensure all your ACA reporting responsibilities can be met on time and with accuracy.
