The IRS has announced an increase to the affordability threshold to 9.83% of employee pay for 2021. This is a slight increase from the 9.78% allowed for 2020. Employers looking to offer an Individual Coverage HRA (ICHRA) in 2021 will want to read on to see how this threshold may influence the allowance offered to employees during 2021.
What does ICHRA affordability mean?
As part of the Affordable Care Act (ACA), the employer mandate requires employers with 50+ full time equivalent (FTE) employees to provide health insurance to their employees.
The affordability threshold is the highest percentage of household income an employee can be required to pay out of pocket for monthly health insurance premiums.
What are the safe harbors to determine household income?
Since employers cannot ask their employees outright what their annual household income is, the IRS has set forth three safe harbors employers can use to calculate affordability.
- W2 Wages- as reported in Box 1 of W2
- Rate of pay- multiply the hourly rate by 130 to get the monthly amount
- Federal Poverty Line- assume employees earnings are equal to the FPL
How to calculate affordability for ICHRA
In order to determine ICHRA affordability we need to determine the lowest cost self-only silver plan on the marketplace.
An ICHRA is affordable if the remaining amount an employee has to pay for a self-only silver plan on the exchange is less than 9.83% of the employee’s household income for 2021.
Affordable HRA Contribution > Lowest Cost Silver Plan - (9.83% * Employee Household Income)
Insurance premiums are driven by location and age of insured. To allow employers to estimate the cost of plans for their employees, the IRS has allowed the following safe harbors to determine lowest cost silver plans for each employee.
- Location- employer can use primary work address instead of employee residence.
- Age based bands- age of employee on first day of plan year
- Prior year- employers can use prior years rates to determine affordability for the following year (ie 2020 rates can be used to calculate 2021).
If all of this sounds overly complicated, don’t worry! You can upload an employee census to our site and we can run a free affordability analysis for you.
What happens if ICHRA is not affordable to employees?
Once a year the employee has the option to opt-out of ICHRA. If the ICHRA offering is deemed unaffordable to the employee the employee has the option to still participate in the ICHRA or opt-out of the ICHRA and accept a premium tax credit (PTC) from the marketplace.
Applicable Large Employers (ALE) may be liable for ACA penalties for not providing affordable coverage.
Learn more about the Individual Coverage HRA!
Ready to learn more about ICHRA? Take a deep dive with our ICHRA guide, and when you are ready set up a call with one of our dedicated HRA design consultants. They can help you design the benefit for your team!