An Applicable Large Employer must offer its full-time employees minimum essential coverage that is affordable and provides minimum value. Health coverage is considered affordable if the employee’s contribution for the lowest-cost self-only coverage is 9.5% or less of the employee’s household income. In 2021, the affordability percentage is adjusted to 9.83%.
Recognizing that household income is difficult for an employee to determine, the IRS established three safe-harbors that employers may use to determine affordability. These safe harbors are
- W-2 income (the employee’s W-2 box-1 wages for the year);
- Rate of pay (the employee’s hourly rate multiplied by 130 hours per month);
- Federal poverty line (the annual federal poverty line for a single individual divided by 12).
The mainland federal poverty level for 2021 is $12,880. There are separate poverty guidelines that apply for Hawaii and Alaska. This means that the monthly premium amount for the lowest-cost self-only coverage for a plan year starting in 2021 cannot exceed $105.51. Setting employee contributions within the federal poverty level ACA limit will help ensure an employer meets ACA affordability requirements.