IRS Lowers 2022 Employer Health Plan Affordability Threshold to 9.61% of Pay

The IRS announced that employer-sponsored health coverage will satisfy the Affordable Care Act (ACA) affordability requirement next year if the lowest-cost, self-only coverage option an employer offers does not exceed 9.61 percent of an employee's income.

The threshold in 2021 was 9.83 percent. It had risen from 9.78 percent in 2020. The IRS annually adjusts the affordability threshold based on the rate of premium growth for the preceding year over the rate of consumer-price-index growth.

The agency announced the 2022 affordability threshold—also known as the shared-responsibility affordability percentage or cost-sharing limit—on Aug. 30 in Revenue Procedure 2021-36.

"Because this percentage went down, employers could end up with an unaffordable plan this year when it was affordable last year even if everything else stayed exactly the same," wrote Lyndsey Barnett, an attorney at law firm Graydon in Cincinnati.

Employer medical costs are projected to increase 6.5 percent in 2022 on average, absent plan design changes, according to an annual report by consultancy PricewaterhouseCoopers.

Cost-Sharing Limits

Employers offering a health plan option in 2022 that costs employees no more than $103.14 per month for employee-only coverage will automatically meet the ACA affordability standard under the federal poverty line (FPL) affordability safe harbor, benefits advisors point out. 

For 2021 plans using the FPL safe harbor to determine affordability, an employee's maximum monthly premium payment could not exceed $104.53 per month.

A slight drop occurred in the safe-harbor dollar maximum for employee-paid premiums.

"This will mark the first time that the FPL safe-harbor dollar amount has decreased for calendar-year plans," wrote Dorian Smith, a partner at HR consultancy Mercer in New York City, and Cheryl Hughes, a principal in the firm's Washington, D.C., office. "As a result, employers that use this safe harbor will need to reduce the employee contribution for the lowest-cost, self-only option for the 2022 plan year."

Noncalendar-year plans will continue to use the 9.83 percent affordability threshold to determine affordability in 2022 until their new plan year starts, Smith and Hughes explained. In addition, "noncalendar-year plans won't be able to calculate the FPL safe harbor contribution limit for plan years beginning after Jan. 1, 2022, until the Department of Health and Human Services issues the 2022 FPL guidelines in January or February 2022."

The affordability threshold is a key element of the ACA employer mandate—also called the shared-responsibility requirement or the pay-or-play rules—and applies to applicable large employers (ALEs). In general, an employer is an ALE if it (along with any members in its control group) employed an average of at least 50 full-time employees, including full-time-equivalent employees, during the preceding calendar year.

[SHRM members-only HR Q&A: What are the employer shared responsibility penalties under the Patient Protection and Affordable Care Act?]

Affordability Safe Harbors

Under the ACA, the affordability threshold is the highest percentage of household income an employee can be required to pay for monthly health insurance plan premiums, based on the least expensive employer-sponsored plan offered that meets the ACA's minimum essential coverage requirements.

Because employers don't know their employees' household incomes, there are three affordability safe harbors ALEs can use to determine if the annual affordability threshold is being met. The safe harbors are based on information the employer has for each employee, and any of the following can be used:

• Employees' W-2 wages, as reported in Box 1, generally as of the first day of the plan year.
  

• Employees' rate of pay, which is the hourly wage rate multiplied by 130 hours per month as of the first day of the plan year or, for salaried employees, 9.61 percent of the monthly salary as of the first day of the 2022 coverage period.
  "If using the rate of pay safe harbor, premiums for an employee making $15/hour were affordable in 2021 if they were less than $191.68. In 2022, for that same employee, the premium is affordable if less than $187.39," Barnett noted.
  

• The federal poverty level, as published by the Department of Health and Human Services (HHS). Regulations allow employers to use the published FPL rate in effect six months prior to the beginning of the plan year, so a non-calendar-year plan could have a slightly different affordability threshold if uses the FPL table published in January 2022.
  The federal poverty line is $12,880 for individuals through 2021 (although slightly different for employees in Hawaii and Alaska). That amount divided by 12 and multiplied by 9.61 percent equals an allowable monthly premium of $103.14 for 2022 calendar-year plans.
  [Note: some advisors, including Mercer, round up the 2022 maximum monthly premium amount under the FLP safe harbor to $103.15 per month, which is rounded to the nearest penny. Others, perhaps to be cautious, round down to $103.14, as reported above.]
  Using the FPL safe harbor simplifies ACA reporting and coding of Form 1095-C, which plan sponsors file with the IRS for each employee who is offered ACA-compliant health coverage. 
  

"Employers should always use the federal poverty line affordability safe harbor where available" because it results in coverage automatically being deemed affordable with no per-employee calculations necessary, advised Brian Gilmore, lead benefits counsel at Newfront, an insurance and financial services firm in San Francisco.

Employers that do not offer a medical plan option meeting the FPL affordability safe harbor, Gilmore wrote, should instead use the rate of pay affordability safe harbor, which "requires a straightforward analysis of the lowest hourly rate of pay for hourly full-time employees and the lowest monthly salary for salaried full-time employees."

The Form W-2 affordability safe harbor "provides little predictability because employees' Box 1 wages are unknown until January of the following year," Gilmore noted.

[Added: 1/19/22]

2021 and 2022 Federal Poverty Lines

In January 2022, HHS released its 2022 Federal Poverty Guidelines. IRS regulations "expressly allow employers to use the federal poverty guideline in effect six months before the beginning of the plan year," noted the compliance team at advisory firm Hub International "This means employers with plan years beginning January through June may continue using the 2021 federal poverty guideline even though new federal poverty threshold numbers are available."

On the other hand, the firm noted, "programs with plan years beginning from July–December fall outside that 'six-month prior' range. For such plans, one approach is to use the premium based on the 2021 federal poverty guideline until the 2022 guideline is released, and then increase the required employee contribution. However, this can create employee relations concerns and administrative difficulty."

Among those issues, Hub pointed out: "Employees may have budgeted based on one premium and not be pleased with an increase (even one that, in some years, may appear relatively small). Such a change may also have implications for the employer's insurance carrier. Finally, an employer may need to evaluate, based on the size of the change in the federal poverty guideline and its workforce composition, whether employees need to be given the opportunity to change their elections."

Related SHRM Article:

No Deadline Extensions for ACA Reporting in 2022, SHRM Online, November 2021

IRS Announces 2022 Limits for HSAs and High-Deductible Health Plans, SHRM Online, May 2021