IRS Decreases Affordability Percentage for 2020

IRS Decreases Affordability Percentage for 2020

The Internal Revenue Service (IRS) recently announced updated affordability percentages that are effective for taxable years and plan years beginning January 1, 2020.

The IRS is decreasing the affordability percentage index from 9.86% in 2019 to 9.78% for the 2020 plan year. Coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed 9.78% percent of the employee’s household income.

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 2020 plan year. 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 9.78% 2020 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, 2019 and January 1, 2020:

  • 2019: $10 an hour x 130 hours = $1300 X 9.86% = $128.18 maximum monthly contribution, through December 31, 2019
  • 2020: $10 an hour x 130 hours = $1300 X 9.78% = $127.14 maximum monthly contribution, effective January 1, 2020 – December 31, 2020

 Example using Federal Poverty Line safe harbor:
Under the Federal Poverty Line (FPL) affordability safe harbor, similar calculations are made. Employees may have higher allowed premiums than they did in 2019 due to the increase in the FPL which offsets 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 9.86% of the 2019 FPL of $12,140 with a premium of $99.75 per month. For 2020, the FPL safe harbor will use 9.78% of the 2017 FPL of $12,490 with a premium of $101.79 to meet the safe harbor requirement.

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.