Your Health Plan May No Longer Be Affordable – IRS Lowers Affordability Percentage

If you are a large employer required to provide health plan coverage to avoid the employer mandate shared responsibility penalties, it is prudent to reevaluate your health plan contribution structure each year before open enrollment to ensure that your plan is still “affordable.”   Since the passage of the ACA, it is no longer a strategy to set it and forget it with your premiums.   Most employers were diligent about calculating affordability in the first few years the shared responsibility penalties were in effect, but we have seen some start to get lax on continuing to do it each year.  Since the change in Administration, we are already seeing an increased focus on ACA compliance and expect to see a ramp up in employer penalty notification.  A failure to consider whether your plan is affordable when passing through any premium increases could result in an unintended penalty for each employee who enrolls in exchange coverage and qualifies for financial assistance.

And even if you do not increase your premiums at all this year, what was affordable last year may be unaffordable this year due to a reduction in the affordability percentage.  In order to be considered to have offered an affordable plan, the employer must have at least one health plan option where the employee’s share of single coverage is less than the affordability percentage multiplied by the employee’s household income.   The IRS adjusts the affordability percentage each year and for 2022 the cost of single coverage must be less than 9.61% of an employee’s household income in order to be affordable.  This 9.61% is the same percentage that employers need to use when relying on the federal poverty level, rate of pay, or W-2 affordability safe harbor.  The 9.61% is down from the 2021 percentage, which was 9.83%.  Because this percentage went down, employers could end up with an unaffordable plan this year when it was affordable last year even if everything else stayed exactly the same.  For example, if using the rate of pay safe harbor, premiums for an employee making $15/hour were affordable in 2021 if they were less than $191.68.  In 2022, for that same employee, the premium is affordable if less than $187.39.

If you need assistance in determining whether your plan is affordable or which safe harbor would be best, please contact any member of the Graydon employee benefits team.

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