For 2021, the Affordable Care Act’s (ACA) Employer Mandate is still in effect for Applicable Large Employers (ALEs). These ALEs must provide coverage that is “affordable” to all eligible full-time employees. For 2021, coverage is deemed to be “affordable” if the employee is charged no more than 9.83%% of their household income. Because it is difficult to calculate an employee’s household income, three safe harbors were put in place to provide an alternative method of calculating affordability.
Using this safe harbor alternative, coverage is deemed affordable if the employee is charged no more than 9.83% of current year wages as indicated in Box 1 of their W-2 form. Because you have to use current-year wages, which aren’t known until the end of the year, this seemingly simplistic alternative can delay knowledge of whether the plan is affordable until after the year has completed. An example of the W-2 method is as follows:
Dave works at ABC Company for the entire year and is offered coverage for all 12 months. Box 1 on his W-2 form shows his wages to be $40,000. The formula to determine affordability is: $40,000 x .0983 divided by 12 months = $327.67 per month. ABC Company will be considered to offer affordable coverage if Dave is not charged more than $327.67 per month for coverage.
With this method, coverage is deemed to be affordable if the employee is charged no more than 9.83% of their monthly rate of pay at the start of the coverage period. 130 hours is used to determine the monthly rate of pay for hourly employees. The actual number of hours worked is not relevant under this method. The rate of pay method should not be used for employees who receive wages by virtue of tips or employees who are paid solely by commissions. An example using the rate of pay method is as follows:
Dave works for ABC Company and is paid $15 per hour at the start of the plan year. The formula to determine affordability is $15.00 x 130 hours = $1,950 x .0983 = $191.69 per month. ABC Company coverage will be affordable provided Dave is not charged more than $191.69 per month for coverage.
Coverage is deemed affordable if the employee is charged no more than 9.83% of the most recently published mainland FPL for a household of one. A simple example of this is as follows:
For the 2021 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 9.83 percent of the FPL [which is] $12,760 for the mainland U.S., or $104.53 per month, calculated as (9.83 percent x $12,760 FPL) ÷ 12, rounded to the nearest penny.
For 2021, a penalty of $2,700 shall apply per full-time employee minus the first 30 will be incurred if the employer fails to offer minimum essential coverage to 95 percent of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange. The B penalty for 2020 was $321.67 per month ($3,860 annualized) per full-time employee receiving subsidized coverage on the ACA marketplace exchange. In 2021, the penalty increased to $338.33 per month ($4,060 annualized).