The Internal Revenue Service (IRS) recently announced updated affordability percentages that are effective for taxable years and plan years beginning January 1, 2018. The changes include:
- Decrease to affordability percentage index
The IRS is decreasing the affordability percentage index from 9.69% in 2017 to 9.56% for the 2018 plan year. Coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed 9.56% percent of the employee’s household income. This is the first inflation-adjusted decrease since the ACA was enacted.
- Decrease to income percentage used to determine premium tax credits for individuals.
The dollar amount individuals eligible for premium tax credits must contribute toward the cost of Marketplace Exchange coverage will also decrease slightly. The adjusted percentage will range from 2.01% to 9.56%, dependent on household income bands in relation to federal poverty levels.
These reductions could financially impact employers who may need to adjust their employer share of self-only, qualified health plan coverage in order to qualify under one of the three affordability safe harbor tests (Federal Poverty Line, Rate of Pay, and W2 Box 1). This percentage is important when setting employer contributions for self-only coverage for the 2018 plan year. Health e(fx) clients should use the affordability tests when making contribution and plan decisions in the coming months.
Example using the hourly Rate of Pay affordability safe harbor:
To determine the self-only contribution premium for hourly employees, multiply the hourly rate of pay for each employee by 130 (hours) at the beginning of the coverage period. That result, multiplied by the 9.56% 2018 affordability percentage, will provide you with the self-only contribution maximum for the employee.
Note: The decrease in the contribution maximum is due to the affordability percentage reduction for 2018; from 9.69% in the plan year beginning in 2017 to 9.56% in the plan year beginning in 2018.
Maximum monthly contributions for John Smith earning $10 per hour, plan year beginning January 1, 2017 and January 1, 2018:
- 2017: $10 an hour x 130 hours = $1300 X 9.69% = $125.97 maximum monthly contribution, through December 31, 2017
- 2018: $10 an hour x 130 hours = $1300 X 9.56% = $124.28 maximum monthly contribution, effective January 1, 2018 – December 31, 2018
Example using federal poverty line safe harbor:
Under the Federal Poverty Line (FPL) affordability safe harbor, similar calculations are made. Employees may also have higher allowed premiums than they did in 2017 due to the increase in the FPL which offsets of the decrease in the applicable annual percentage.
For example, a calendar year plan can meet the FPL safe harbor (for states other than Alaska and Hawaii due to their increased FPL thresholds) with a premium set at 9.69% of the 2016 FPL of $11,880* with a premium of $95.93 per month. For 2018, the FPL safe harbor will use 9.56% of the 2017 FPL of $12,060** with a premium of $96.07 to meet the safe harbor requirement.
Keeping up-to-date with changing requirements can be tough, especially given the uncertainty around the future of the ACA. We’re here to help. Despite the uncertainty, Health e(fx) continues to invest in our solutions so that our systems are up-to-date with new laws and requirements. If you have questions about healthcare coverage affordability, contact your Health e(fx) Account Manager or email us at email@example.com.
*2016 Calendar Year Plan-FPL for Alaska: $14,840 and Hawaii: $13,670
**2017 Calendar Year Plan- FPL for Alaska: $15,060 and Hawaii: $13,860