Caution — Affordability Percentage Declining for 2018

Employers who are beginning assessing their plans for 2018 may need to revisit their contribution strategy if they are subject to the employer responsibility requirements of the ACA. Employers who are “applicable large employers” (ALEs) must ensure that coverage is “affordable” in order to avoid the ACA’s employer penalty.

Employer sponsored coverage was initially defined as an employee contribution for self-only coverage of no more than 9.5% of  the employee’s household income. The safe harbor established by the IRS affirmed that employers don’t know an employee’s household income; substituting the use of Form W-2 wages.

The affordability percentage is indexed and, as such, has gradually increased reaching 9.69% in 2017. However, 2018’s limit will decrease to 9.56%. As a result, even if an employer’s health plan premium doesn’t increase, the employer may have to up the employer’s contribution to keep coverage affordable. See the simplified example below:

Year       Affordability %   Annual W-2     Affordability      Max. Contribution

2017      9.69%                   $45,000               4360.50               $363.38

2018      9.56%                   $45,000               4302.00               $358.50

Employers who use the federal poverty level safe harbor will benefit from an increase in the federal poverty level to offset the affordability percentage decrease. The maximum monthly contribution using the FPL safe harbor will increase as shown below.

Federal Poverty Level Safe Harbor

Year                  Prior Year FPL   Affordability %   Maximum Monthly Contribution

2017                     $11,880               9.69%                   $95.93

2018                     $12,060               9.56%                   $96.08

With the daily news of Congressional deliberations to “repeal and replace” the ACA, some wonder if compliance with the ACA is still required. Unless and until legislation is passed by the House and Senate and signed by the President, compliance with the provisions of the ACA is recommended.

The IRS Revenue Procedure announcing the 2018 affordability measure is here.