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On Behalf of | Sep 8, 2021 | ACA |


Last week the IRS released the ACA affordability percentage threshold for medical plan years beginning in 2022 (IRS Revenue Procedure 2021-36); resulting in a decrease to 9.61% for 2022, down from the 2021 threshold percentage of 9.83%.

This decrease in the 2022 affordability percentage threshold may cause an increase in employer contribution if the 2021 employer contribution was set at, or very close to, the 9.83% maximum rate applicable to 2021. Employers should review their medical plan contribution strategy for the coming plan year and adjust accordingly. In doing so, remember that:

  • Affordability is measured using the single only coverage rate for the lowest cost health plan offered by the employer that meets minimum value standards – regardless of whether or what coverage level the employee has enrolled in.
  • The ACA affordability percentage threshold applies on a plan year basis, while employer shared responsibility penalties are assessed monthly on a calendar year basis.
  • Employers meeting one of the ACA affordability safe harbors will not be subject to the Code section 4980H(b) penalty (the “affordability penalty”) for a full-time employee enrolled in an Exchange/Marketplace plan and receiving a federal advance premium tax credit based on household income.

The federal poverty line (FPL) safe harbor will be $103.14 per month in 2022.

The rate of pay safe harbor is calculated monthly and uses the employee’s hourly rate of pay on the first day of the plan year multiplied by 130 hours. The rate of pay safe harbor is preferred by many employers because they can plan prospectively using information available as of the first day of the current plan year and there are no adjustments for partial year eligibility or reductions for pre-tax payments. One drawback with using the rate of pay is that only the first 130 hours worked by the employee each month are included in the calculation, even if the employee works more hours in the month.

The W-2 safe harbor is calculated after the close of the calendar year and is based on W-2 income reported in Box 1 (after other pre-tax deductions have been taken). The employer will not know actual W-2 income until the close of the year.  For example, to determine affordability for 2022, the 2022 W-2 for the employee must first be prepared for distribution by January 31, 2023.  A 2021 W-2 cannot be used to determine affordability for 2022 (although 2021 W-2 income may be a reasonable benchmark for 2022).  In addition, W-2 income must be adjusted (reduced) — in cases where coverage is not available to the employee for the entire calendar year — by a fraction equal to the number of months for which coverage was offered/available to the employee over (divided by) the number of calendar months in the employee’s period of employment with the employer during the calendar year.