IRS Announces Affordability Threshold for 2021

The IRS has announced that the 2021 shared-responsibility affordability percentage will increase slightly from the 2020 limit.  Under the Affordable Care Act (ACA), employer-sponsored health coverage will satisfy the affordability requirement if the lowest-cost self-only coverage option available to employees does not exceed 9.83 percent of an employee’s household income.

Employers may not be privy to their employees’ household income, so they have three affordability safe-harbor options based on information available to them:

  • Form W-2 wages, based on the amount of wages paid to the employee reported in Box 1 of Form W-2.
  • Rate-of-pay, based on the employee’s hourly rate or monthly salaried rate at the beginning of the coverage period.
  • Federal poverty line, where the employee contribution may not exceed 9.83% of the federal poverty line for a single individual for the applicable calendar year.

Employers should note the annual inflation-adjusted cost-sharing limits for group health plan coverage and offer at least one plan option below the threshold to avoid triggering penalties for failure to provide affordable coverage under the ACA’s shared-responsibility provision.  Employers may need to lower their employee contributions for the lowest-cost self-only coverage option for plan years beginning in 2021.  The adjusted percentage applies on a plan-year, not a calendar-year, basis.

The employer shared-responsibility penalties for 2021 are $2,700 per full-time employee for failure to offer minimum-essential coverage to at least 95% of full-time employees and $4,060 per employee receiving a subsidy for failure to offer affordable coverage meeting minimum value.

If you have questions about this provision of the ACA, call ASR Health Benefits at (616) 957-1751 or (800) 968-2449.  You may also review Revenue Procedure 2020-36.