ACA’s Affordability Percentages

The affordability of health coverage is a key point in determining whether an ALE (Applicable Large Employer) will be subject to a penalty. The pay or play rules generally determine affordability of employer-sponsored coverage by reference to the rules for determining premium tax credit eligibility.

Therefore, for 2014, employer-sponsored coverage is considered affordable under the pay or play rules if the employee’s required contribution for self-only coverage does not exceed 9.5 percent of the employee’s household income for the tax year. As noted above, this required contribution percentage was adjusted to:

  • 9.56 percent for 2015; and
  • 9.66 percent for 2016.

The affordability test applies only to the portion of the annual premiums for self-only coverage, and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.

Affordability Safe Harbors

Because an employer generally will not know an employee’s household income, the IRS created three affordability safe harbors that measure affordability based on:

  • Form W-2 wages from that employer;
  • The employee’s rate of pay; or
  • The federal poverty line (FPL) for a single individual.

The affordability safe harbors are all optional. An employer may use one or more of the safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.

Although the general pay or play affordability rules determine affordability by reference to the rules for determining premium tax credit eligibility, these affordability safe harbors do not reference the premium tax credit eligibility rules. Instead, the safe harbor rules specifically use 9.5 percent as the required contribution.

Thus, based on a literal reading of the affordability safe harbor rules, ALEs using any of the affordability safe harbors in years after 2014 will measure their plan’s affordability using a required contribution of 9.5 percent (instead of the adjusted affordability percentage for the year).

ALEs who are not using any of the affordability safe harbors in years after 2014 will apply the required contribution percentage under the premium tax credit eligibility rules. As a result, these employers can measure their health plan’s affordability using the adjusted affordability percentage for the year (9.56 percent in 2015 and 9.66 percent in 2016).

Although Rev. Proc. 2014-62 did not address this disconnect, the IRS may issue guidance in the future on this issue.


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The information provided is for informational purposes only and does not constitute legal advice. The information above contains only a summary of the applicable legal provisions and does not purport to cover every aspect of any particular law, regulation or requirement. Depending on the specific facts of any situation, there may be additional or different requirements. This is to be used only as a guide and not as a definitive description of your compliance obligations.