IRS Reduces 2018 ACA Affordability Contribution Percentage

September 1, 2017

Quick Facts:

• Several Affordable Care Act (ACA) provisions measure the affordability of employersponsored health coverage.
• “Affordability” is defined differently depending on the specific ACA provision.
• Employers subject to the ACA’s employer shared responsibility provisions may be subject to penalties if the coverage offered to full-time employees is unaffordable.
• For 2018, the threshold contribution percentages to determine the affordability of an applicable large employer’s (ALE) health plan under the ACA’s employer shared responsibility rules is reduced to 9.56%.
• As a result of the reduction, some employers may need to reduce employee contributions for health coverage in 2018 to avoid potential ACA penalties.

Several Affordable Care Act (ACA) provisions measure an employer-sponsored health coverage’s affordability, including:

• the shared responsibility penalty for applicable large employers (ALEs) (also known as “play or pay” or the “employer mandate”);
• an exemption from the tax penalty imposed on individuals who fail to obtain health insurance coverage (also known as the “individual mandate”); and
• the premium tax credit for low-income individuals to purchase health coverage through an ACA Marketplace.

The Internal Revenue Service (IRS) recently issued Revenue Procedure 2017-36 to adjust the threshold contribution percentages in 2018 to determine the affordability of an ALE’s group health plan under the ACA.

For plan years beginning in 2018, the IRS will consider employer-sponsored coverage affordable if an employee’s required contribution for self-only coverage does not exceed:

• 9.56% of the employee’s household income for the year, for purposes of ACA employer shared responsibility rules and premium tax credit eligibility; and
• 8.05% of the employee’s household income for the year, for purposes of an exemption from the individual mandate.

Although all of these ACA mandates involve an affordability determination, the test for affordability varies for each provision, as described in the chart below.

Employer Shared Responsibility Penalty

SUMMARY : Applicable large employers that do not offer health coverage to their full-time employees (and children), or that offer coverage that is unaffordable or does not provide minimum value, may be subject to a penalty.

AFFORDABILITY MEASURE FOR EMPLOYEES : Coverage is affordable if the employee portion of the premium for the lowest-cost, self-only coverage that provides minimum value does not exceed 9.5%* (as adjusted) of an employee’s W-2 wages, rate-of-pay income or the federal poverty level for a single individual. For 2017, this affordability measure is 9.69%. In 2018, the measure decreases to 9.56%.

AFFORDABILITY MEASURE FOR FAMILY MEMBERS : Coverage is affordable if the employee’s self-only coverage cost (under the lowest-cost minimum value plan) does not exceed 9.5%* (as adjusted) of an employee’s W-2 wages, rate-of-pay income or the federal poverty level for a single individual. For 2017, this affordability measure is 9.69%. In 2018, the measure decreases to 9.56%. The cost of family coverage is not taken into account.

Individual Mandate

SUMMARY : Most individuals must obtain health coverage for themselves and their family members or pay a penalty. However, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate.

AFFORDABILITY MEASURE FOR EMPLOYEES : Coverage is affordable if the required contribution for the lowest-cost, selfonly coverage does not exceed 8.16% of household income in 2017 and 8.05% of household income in 2018.

AFFORDABILITY MEASURE FOR FAMILY MEMBERS : Coverage is affordable if the required contribution for the lowest-cost family coverage does not exceed 8.16% of household income in 2017 and 8.05% of household income in 2018.

Premium Tax Credit

SUMMARY : The premium tax credit helps eligible individuals and families purchase health insurance through an ACA Marketplace. Employees (and their family members) who are eligible for coverage under an employer-sponsored plan that is affordable and provides minimum value are not eligible for ACA’s premium tax credit

AFFORDABILITY MEASURE FOR EMPLOYEES : Coverage is affordable if the employee’s cost for self-only coverage does not exceed 9.69% in 2017 and 9.56% in 2018.

AFFORDABILITY MEASURE FOR FAMILY MEMBERS : Coverage is affordable if the employee’s cost for self-only coverage does not exceed 9.69% in 2017 and 9.56% in 2018. The cost of family coverage is not taken into account.

*In 2015, the IRS clarified that the affordability safe harbor percentage for ALEs is the same as the inflationadjusted percentage that determines affordable individual health coverage for purposes of the premium tax credit. Further, ALEs using an affordability safe harbor could – but were not required to – rely upon 9.69% for coverage offered in 2017.

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