On July 21, 2020, the IRS released the ACA affordability percentages for 2021. These changes take effect for taxable plan years beginning January 1, 2021.
Here are important details to know so you’re prepared to adjust affordability percentages.
Understanding the ACA Update
The IRS updated contribution percentages for 2021 for employer-sponsored coverage on July 21, 2020. This coverage will be considered affordable within required employee contribution limits for the following conditions:
1. Self-only coverage must not exceed 9.83% of the employee’s annual household income in order to be eligible for tax credits.
2. To claim an individual mandate exemption, self-coverage must not exceed 8.27% of the employee’s annual household income.
The first penalty relates to pay or play rules, which explains the employer shared responsibility at certain large companies. The second penalty had been reduced to zero in 2019, but now certain people need to claim an exception for completely different reasons.
How the ACA Has Evolved Since 2014
The original Affordable Care Act was enacted in 2010, with the intention of phasing in provisions from 2014 through 2020. All three major purposes (employer shared responsibility, individual mandate exemption, and premium tax credit availability) have increased incrementally in terms of percentages. Rate increases for required contributions are adjusted each year to reflect the premium growth rate.
Affordability Percentage for 2021
ACA rules determine the affordability percentage for 2021, particularly for applicable large employers (ALEs). These firms must offer affordable, minimum health care plans to full-time employees and dependents. Failure to provide such coverage may result in a penalty for the employer.
It’s possible for employers to choose one of three affordability safe harbors for measuring coverage affordability based on these factors:
1. W-2 wages issued by the employer
2. Employee’s pay rate
3. Individual federal poverty line (FPL)
No additional costs for family coverage will occur, as the affordability test only relates to the part of annual premiums for self-only coverage. An individual may still claim an exemption to the ACA mandate under certain conditions.
Contact the experts at CIA Insurance and Risk Management to learn more about the updated affordability percentages.
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