Employee Benefit Question of the Week: Affordability Provisions and AC

QUESTION: Why are there multiple affordability provisions related to the ACA?

ANSWER: Under the ACA, the affordability of an employer’s plan may be assessed for the pay or play penalty, the individual mandate and the premium tax credit. Below is a brief summary of each affordability provision and to whom they apply.  The affordability test that is used varies for each provision.

  • The employer shared responsibility penalty for applicable large employers (also known as the pay or play rules or employer mandate);
  • An exemption from the individual mandate tax penalty for individuals who fail to obtain health coverage; and
  • The premium tax credit for low-income individuals to purchase health coverage through an Exchange.

Employer Shared Responsibility Rules

The ACA’s employer shared responsibility or pay or play rules require ALEs to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty.  The percentage for 2020 is 9.78%.

Individual Mandate Exemption

The ACA’s individual mandate requires most individuals to obtain acceptable health coverage for themselves and their family members or pay a penalty. However, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. The percentage for 2020 is 8.24%.  While the penalty is now $0, final rule notes that individuals may still need to seek this exemption for 2019 and future years (for example, in order to be eligible for catastrophic coverage).

Premium Tax Credit

The ACA provides premium tax credits to help low-income individuals and families afford health insurance purchased through an Exchange. The amount of a taxpayer’s premium tax credit is determined based on the amount the individual should be able to pay for premiums (expected contribution). The expected contribution is calculated as a percentage of the taxpayer’s household income, based on the Federal Poverty Level.

Income Level
Up to 133% FPL 2.06%
133-150% FPL 3.09-4.12%
150-200% FPL 4.12-6.49%
200-250% FPL 6.49-8.29%
250-300% FPL 8.29-9.78%
300-400% FPL 9.78%

Source: Zywave

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