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How the 2022 ACA Affordability Decrease to 9.61% Affects Employers

Executive Summary

  • 2022 Affordability Percentage Decrease to 9.61%: The IRS has announced that ACA affordability percentage will decrease from 9.83% in 2021 to 9.61% in 2022.
  • 2022 Lowest-Cost Plan is No More Than $103.14/Month: Employers offering a medical plan option in 2022 that costs employees no more than $103.14 per month for employee-only coverage will automatically meet the ACA affordability standard.  Such employers should utilize the federal poverty line affordability safe harbor that deems coverage affordable for all full-time employees, as well as the qualifying offer method for streamlined ACA reporting.
  • 2022 Lowest-Cost Plan Exceeds $103.14/Month: Employers that do not offer a medical plan option meeting the 2022 federal poverty line affordability safe harbor (i.e., the lowest-cost plan option at the employee-only tier costs employees more than $103.14/month) should generally utilize the rate of pay affordability safe harbor.  This approach requires a straightforward analysis of the lowest hourly rate of pay for hourly full-time employees and the lowest monthly salary for salaried full-time employees.
  • 2022 Contribution Strategy Considerations: When designing 2022 employee contribution levels, consider these affordability safe harbors to avoid potential ACA employer mandate “B Penalty” liability.  Where possible within budgetary constraints, employers should consider offering at least one medical plan option to full-time employees in all regions with an employee-share of the premium not exceeding $103.14/month for employee-only coverage to simplify affordability compliance.

2022 Affordability Percentage Set at 9.61% 

This week the IRS issued Revenue Procedure 2021-36, which decreases the affordability threshold for ACA employer mandate purposes to 9.61% for plan years beginning in 2022.

The historical breakdown is as follows:

  • 2015 Percentage: 9.56%
  • 2016 Percentage: 9.66%
  • 2017 Percentage: 9.69%
  • 2018 Percentage: 9.56%
  • 2019 Percentage: 9.86%
  • 2020 Percentage: 9.78%
  • 2021 Percentage: 9.83%
  • 2022 Percentage: 9.61%

The affordability percentage decrease is based on the ACA’s index inflation metric, which is the rate of premium growth for the preceding year over the rate of CPI growth for the preceding year.  The affordability percentages apply for plan years beginning in the listed year.  A calendar plan year will therefore have the 9.61% affordability threshold for the plan year beginning January 1, 2022.

Although the Revenue Procedure primarily addresses eligibility thresholds for Exchange subsidies (the §36B premium tax credit), the IRS confirmed in IRS Notice 2015-87 (frequently referred to as the “ACA Potluck Guidance”) that the employer mandate affordability safe harbors are indexed for inflation in the same manner as affordability is determined on the Exchange.

Note that although ARPA temporarily lowered the affordability threshold Revenue Procedure 2021-36 confirms that change does not affect the ACA employer mandate affordability threshold.

Which Employers Need to Worry About ACA Affordability?

The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.”  In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

ALEs are receiving IRS Letters 226J informing them of ACA employer mandate penalty assessments under both the A Penalty and B Penalty (described below).  These assessments can be very large.

For more details, see our prior posts:

Why Does it Matter if an ALE Offers “Affordable” Coverage? 

There are two potential ACA employer mandate penalties.

a.) IRC §4980H(a)—The “A Penalty”

The first is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.”  This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.

The 2021 A Penalty is $225/month ($2,700 annualized) multiplied by all full-time employees (reduced by the first 30).  It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange.

The IRS has not yet released the 2022 A Penalty amount, but it is projected to increase slightly to $229.17/month ($2,750 annualized) multiplied by all full-time employees (reduced by the first 30).

A Penalty liability is focused on whether the employer offered a major medical plan to a sufficient percentage of full-time employees—not whether that offer was affordable (or provided minimum value).

b.) IRC §4980H(b)—The “B Penalty”

The second is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.”  This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees).  It applies for each full-time employee who was a) not offered minimum essential coverage, b) offered unaffordable coverage, or c) offered coverage that did not provide minimum value.

In other words, an ALE who offers minimum essential coverage to a full-time employee will be subject to the B Penalty if a) the coverage does not provide minimum value or is not affordable, and b) the full-time employee declines the offer of coverage and instead enrolls in subsidized coverage on the Exchange.

Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty.  Unlike the A Penalty, the B Penalty is multiplied by all full-time employees.

The 2021 B Penalty is $338.33/month ($4,060 annualized) per full-time employee receiving subsidized coverage on the Exchange.

The IRS has not yet released 2022 the B Penalty amount, but it is projected to increase slightly to $343.33/month ($4,120 annualized) per full-time employee receiving subsidized coverage on the Exchange.

Therefore, an ALE’s failure to offer coverage that meets the ACA affordability standard for any given full-time employee creates a B Penalty liability of $338.33/month ($4,060 annualized) for that full-time employee.  This amount will increase slightly for 2022.

 How Does the ACA Affordability Test Work?

The ACA affordability test is based on the employee-share of the premium for employee-only coverage under the ALE’s lowest cost plan option in which the employee is eligible to enroll (that provides minimum value).  In other words, you look to the lowest possible amount that an employee could pay to enroll in the employer’s major medical plan.

Employers that offer different medical plan options to different groups of employees will need to look to the lowest cost plan option available to each particular employee group to determine affordability. This issue most commonly arises for employers with different regional coverage for employees in various states.  For example, the lowest cost plan option may be a regional HMO in California that is not available to employees in other states. In that situation, the affordability analysis for employees in the other states (who are not eligible for the CA regional HMO) is based on the lowest cost plan option available to those particular employees.

The affordability test technically looks to whether that lowest possible employee contribution is within 9.5% (indexed for inflation) of the employee’s household income.  However, the IRS recognizes that employers generally do not know the employee’s household income.

Therefore, the IRS provides three safe harbors for ALEs to determine whether an offer of coverage is affordable for purposes of avoiding B Penalty liability:

  1. Federal Poverty Line Affordability Safe Harbor
  2. Rate of Pay Affordability Safe Harbor
  3. Form W-2 Affordability Safe Harbor

If an ALE’s offer meets any of these safe harbors, the offer of coverage is deemed affordable for B Penalty purposes—regardless of whether the employee may qualify for Exchange subsidies based on the employee’s actual income and number of household members.

The affordability status of an offer is not affected by an employee electing to enroll in coverage other than the lowest possible employee contribution amount.  For example, if an employee chooses the highest-cost family plan coverage option, the offer’s affordability status is still determined by reference to the lowest cost employee-only coverage option that was available to the full-time employee.

May an ALE Use More than One Affordability Safe Harbor?

Yes, the ALE may choose different safe harbors for any reasonable category of employees.  However, the caveat is that the ALE must apply each safe harbor on a uniform and consistent basis for all employees in each category.

The IRS states that reasonable categories include specified job categories, nature of compensation (such as salaried or hourly), geographic location, and similar bona fide business criteria.  Listing employees specifically by name (or other categories having the same effect) is not considered a reasonable category.

1) The Federal Poverty Line Affordability Safe Harbor

Action Item: Always use this safe harbor if it is available!

An ALE’s coverage will be automatically deemed affordable for all full-time employees if the offer meets the federal poverty live affordability safe harbor.

In order to qualify, the employee-share of the premium for the ALE’s lowest cost plan option (which provides minimum value) at the employee-only coverage tier cannot exceed 9.61% (2022) of the continental U.S. federal poverty line for a single individual that is in effect within six months before the first day of the plan year, divided by 12.

The 2021 federal poverty line for a single individual in the continental U.S. is $12,880.

Accordingly, for calendar plan years, the 2022 federal poverty line affordability safe harbor applies where the lowest possible employee contribution for the major medical plan does not exceed $103.14.

The historical breakdown is as follows:

  • 2015 Federal Poverty Line Limit: $92.97/month
  • 2016 Federal Poverty Line Limit: $94.74/month
  • 2017 Federal Poverty Line Limit: $95.93/month
  • 2018 Federal Poverty Line Limit: $96.08/month
  • 2019 Federal Poverty Line Limit: $99.75/month
  • 2020 Federal Poverty Line Limit: $101.79/month
  • 2021 Federal Poverty Line Limit: $104.52/month
  • 2022 Federal Poverty Line Limit: $103.14/month

Action Item: Consider offering a plan option in 2022 that costs full-time employees no more than $103.14/month to simplify affordability compliance.

ACA Reporting Under the Federal Poverty Line Safe Harbor

ALEs meeting the federal poverty line affordability safe harbor may utilize the Qualifying Offer Method (provided the offer of coverage was made available to the employee’s spouse and dependents, if any).

Under the Qualifying Offer Method, the employer does not complete Line 15 of the full-time employee’s Form 1095-C.  This streamlined reporting option is available because the monthly employee-share of the premium for the lowest cost plan at the employee-only tier is not relevant for B Penalty purposes where coverage is deemed affordable for all employees under the federal poverty line affordability safe harbor.

The employer must check the “Qualifying Offer Method” box in Line 22 (Box A) of the Form 1094-C to take advantage of this approach.  For full-time employees who are offered coverage, the employer will list Code “1A” (qualifying offer) in Line 14 of the full-time employee’s Form 1095-C.

See our previous posts for more details:

If the employee waives coverage, the employer generally will enter Code “2G” (federal poverty line affordability safe harbor) in Line 16 to confirm that no B Penalty could apply for the full-time employee.  The Forms 1094-C and 1095-C Instructions state the employer “may, but is not required to, enter an applicable code on line 16 for any month for which code 1A is entered on line 14,” generally recognizing that the qualifying offer code in Line 14 already embeds the federal poverty line affordability report that is redundant in Line 16.  Employees who enroll in the offer of coverage will generally have Code “2C” (enrolled in offer of health coverage) because the enrolled code takes precedence over the affordability safe harbor codes for Line 16.

Action Item: If the plan meets the federal poverty line affordability safe harbor, take advantage of the Qualifying Offer Method for streamlined ACA reporting via Forms 1094-C and 1095-C.

(Note that the Qualifying Offer Method also permits ALEs to provide a substitute form—in place of the standard Form 1095—to full-time employees who received a qualifying offer for all 12 months of the calendar year and were not enrolled in self-insured coverage.  We generally do not recommend this substitute form approach because the employer is still required to provide the Form 1095-C to the IRS.)

2) The Rate of Pay Affordability Safe Harbor

Action Item: In most cases, ALEs that do not meet the federal poverty line affordability safe harbor will want to use the rate of pay affordability safe harbor.

The rate of pay affordability safe harbor applies the applicable affordability percentage based on two separate tests—one for hourly full-time employees, and one for salaried full-time employees.

  • Hourly Full-Time Employees
  • 9.61% (2022) of the employee’s hourly rate of pay as of the first day of the coverage period x 130 hours
  • Note: The hourly rate of pay is multiplied by 130 regardless of actual hours of service performed.  The IRS uses 130 hours of service in a calendar month as a proxy for the 30 hours of service/week full-time status definition in §4980H.
  • Example:
  • Widget Co.’s lowest paid full-time hourly employees are paid at a rate of $15/hour for each calendar month in 2022
  • 130 hours of service x $15/hour = $1,950 assumed monthly income
  • Full-time employee monthly contribution rate for lowest-cost, employee-only coverage cannot exceed 9.61% (2022) of $1,950
  • $1,950 x. 0.0961 = $187.39/month maximum
  • Salaried Full-Time Employees
  • Text: 9.61% (2022) of the employee’s monthly salary as of the first day of the coverage period
  • Note: Special rules apply if the employee’s hourly rate or monthly salary is reduced.
  • Example:
  • Widget Co.’s lowest paid full-time salaried employees are paid a salary of $36,000 in 2022
  • $36,000 / 12 = $3,000 monthly salary
  • Full-time employee monthly contribution rate for lowest-cost, employee-only coverage cannot exceed 9.61% (2022) of $3,000
  • $3,000 x 0.0961 = $288.30/month maximum

Action Item: An ALE will meet the rate of pay affordability safe harbor for all full-time employees if the employee-share of the premium for the lowest-cost plan at the employee-only tier does not exceed these monthly maximum thresholds.  

In the examples above, Widget Co.’s plan would be affordable for all full-time employees (hourly and salaried) if the lowest possible amount that an employee could pay to enroll in the employer’s major medical plan does not exceed $187.39/month.

ACA Reporting Under the Rate of Pay Safe Harbor

If the employee waives coverage, the employer will enter Code “2H” (rate of pay affordability safe harbor) in Line 16 to confirm that no B Penalty could apply for the full-time employee.  Employees who enroll in the offer of coverage will always have Code “2C” (enrolled in offer of health coverage) because the enrolled code takes precedence over the affordability safe harbor codes for Line 16.

3) The Form W-2 Affordability Safe Harbor

Action Item: This is generally the least desirable affordability safe harbor.  Most employers will want to attempt to meet the federal poverty line or rate of pay affordability safe harbors before assessing the Form W-2 affordability safe harbor.

The Form W-2 affordability safe harbor provides that coverage is affordable if the employee-share of the premium for the lowest cost plan option at the employee-only tier does not exceed 9.61% (2022) of the employee’s Box 1 wages on the Form W-2.

This Form W-2 safe harbor approach has several disadvantages:

  • Disadvantage #1: The Form W-2 affordability safe harbor provides little predictability because employees’ Box 1 wages are unknown until January of the following year. For example, an ALE would not know until January of 2023 whether it met the Form W-2 affordability safe harbor for any full-time employee in 2022.
  • Disadvantage #2: Box 1 of the Form W-2 does not include many common forms of compensation, including 401(k)/403(b)/457(b) employee deferrals and Section 125 salary reductions for health and welfare plan coverage and FSA/HSA contributions. This can result in a significantly reduced Box 1 amount from an ALE’s expectation for any given full-time employee.
  • The employee-share of the premium must remain consistent as an amount or percentage for the full plan year. This means that employers cannot make mid-year adjustments to address lower-than-anticipated Box 1 amounts.

 In short, the Form W-2 affordability safe harbor is probably well suited only for employers that impose an employee contribution amount based on a fixed percentage of Form W-2 wages throughout the year.  However, most ALEs do not structure contribution tiers in this manner—thereby limiting the Form W-2 affordability safe harbor as a viable contender to only a select few employers.

ACA Reporting Under the Form W-2 Safe Harbor

If the employee waives coverage, the employer will enter Code “2F” (Form W-2 affordability safe harbor) in Line 16 to confirm that no B Penalty could apply for the full-time employee.  Employees who enroll in the offer of coverage will always have Code “2C” (enrolled in offer of health coverage) because the enrolled code takes precedence over the affordability safe harbor codes for Line 16.

How Do Flex Credits Affect the Affordability Determination?

Flex credits will reduce the dollar amount of the employee-share of the cheapest plan option providing minimum value that is used to determine affordability if they meet a three-part test to qualify as a “health flex contribution”:

  1. The employee may not opt to receive the amount as a taxable benefit (i.e., it is not a cashable flex credit);
  2. The employee may use the amount to pay for minimum essential coverage (i.e., the employer’s major medical plan); and
  3. The employee may use the amount exclusively for medical/dental/vision coverage costs.

 Action Item: If you offer a defined contribution-style flex credit approach to employees, make sure that a sufficient portion are designated as “health flex contributions” to qualify under an affordability safe harbor.  This will require at least some of the flex credits be non-cashable and designated for health plan purposes only.

For more details, see our prior post: How the ACA Affects Flex Credits.

How Do Opt-Out Credits Affect the Affordability Determination?

The general rule is that the amount of the opt-out credit must be added to the employee-share of the cheapest plan option providing minimum value that is used to determine affordability.

Example: The employee-share of the premium for the employer’s cheapest plan option providing minimum value is $75/month for employee-only coverage.  The plan offers a $25/month opt-out credit for employees who decline enrollment.  Under the general rule, the plan costs $100/month ($75/month premium plus $25 opt-out credit) for purposes of the affordability rules to reflect the $25/month an employee forgoes when electing to enroll.

To avoid the need to add the opt-out credit amount to the cost of the plan, the opt-out credit must meet the definition of an “eligible opt-out arrangement,” which requires:

  1. The opt-out credit is conditioned on the employee declining to enroll in the major medical plan; and
  2. The opt-out credit is conditioned on the employee providing reasonable evidence (including an employee attestation) annually that the employee and all members of the employee’s expected tax family have or will have minimum essential coverage under a group health plan during the period of coverage to which the opt-out credit applies.

 Note: In late 2016, IRS indefinitely delayed these eligible opt-out arrangement rules for opt-out credits in place prior to December 16, 2015.

Action Item: If you are adding an opt-out credit, make sure that you follow these eligible opt-out arrangement conditions to ensure that the opt-out credit does not affect whether your offer of coverage meets an affordability safe harbor.

Summary

As with just about everything related to the ACA, the affordability determination under the employer mandate rules can be complex.

However, with respect to the determination of which affordability safe harbor ALEs should use, this is generally a straightforward analysis for most employers:

  • The monthly employee-share of the premium for the lowest-cost major medical plan option at the employee-only tier does not exceed $103.14/month (2022): USE THE FEDERAL POVERTY LINE AFFORDABILITY SAFE HARBOR
  • The monthly employee-share of the premium for the lowest-cost major medical plan option at the employee-only tier exceeds $103.14/month (2022): USE THE RATE OF PAY AFFORDABILITY SAFE HARBOR

Employers should always use the federal poverty line affordability safe harbor where available because it a) results in coverage automatically being deemed affordable with no calculations necessary, and b) permits employers to take advantage of streamlined ACA reporting via the Qualifying Offer Method.

In most cases, employers that do not meet the federal poverty line affordability safe harbor (i.e., employees’ monthly lowest cost plan exceeds $103.14/month (2022)) will want to utilize the rate of pay affordability safe harbor by following the calculations outlined above.  This approach has many significant advantages over the Form W-2 affordability safe harbor alternative.


Brian Gilmore

About the author

Brian Gilmore

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.


The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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