IRS Raises Affordability Percentage for 2021

IRS Raises Affordability Percentage for 2021

The Internal Revenue Service (IRS) recently issued Revenue Procedure 2020-36 increasing the affordability percentage index from 9.78% in 2020 to 9.83% for the 2021 plan year. Coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed 9.83% percent of the employee’s household income.

This percentage is important when setting employer contributions for self-only coverage for plans beginning January 1, 2021. Health e(fx) clients should use the affordability tests when making contribution and plan decisions.

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 9.83% 2021 affordability percentage, will provide you with the self-only contribution maximum for the employee.

Maximum monthly contributions for John Smith earning $10 per hour, plan year beginning January 1, 2020 and January 1, 2021:

  • 2020: $10 an hour x 130 hours = $1300 X 9.78% = $127.14 maximum monthly contribution, from January 1, 2020 – December 31, 2020
  • 2021: $10 an hour x 130 hours = $1300 X 9.83% = $127.79 maximum monthly contribution, effective January 1, 2021 -December 31, 2021

Example using Federal Poverty Line safe harbor:
Under the Federal Poverty Line (FPL) affordability safe harbor in 2021, an employee’s premium payment can’t exceed $104.52 per month, up from $101.79 per month in 2020.

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 9.78% of the 2020 FPL of $12,490 with a premium of $101.79 per month. For 2021, the FPL safe harbor will use 9.83% of the 2020 FPL of $12,760 with a premium of $104.53 to meet the safe harbor requirement.

Example using W2 safe harbor:
The W2 safe harbor can be the trickiest safe harbor to use because it cannot be determined until the end of the year. The reason for this is because you need the amount in the W2 Box 1 for the affordability calculation. In order to claim the W2 safe harbor, the following formula is generally used: W2 Box 1 Wages multiplied by 9.83% with an adjustment for partial year coverage.

For example, one of your employees make $45,000 a year, however they have only worked at the company for nine months but has been offered coverage since their first day. To determine affordability, an employer would need to take $45,000 and multiply it by 9.83%. Then multiply the result by 9/12. The maximum annual amount that you can require your employee to pay for self-only coverage is $3,317.62 in order to meet the W2 safe harbor for the nine months the employee has been covered.

Keeping up to date with changing requirements can be tough. We’re here to help. Health e(fx) continues to invest in our solutions so that our systems stay current with new laws and requirements. If you have questions about healthcare coverage affordability, contact your Health e(fx) Account Manager or email us at news@healthefx.us.