New developments may impact employers’ ACA compliance and result in penalties

Just as employers with calendar-year benefit plans are finalizing health plan rates for 2022 and getting ready for open enrollment, a couple of recent developments could affect health plan affordability under the Affordable Care Act (ACA) and result in employers’ noncompliance.

Decrease in affordability percentage

Employers that set their lowest-cost self-only-coverage employee contribution right at the affordability level may have to lower rates for 2022 to continue offering an affordable plan.

The Internal Revenue Service (IRS) affordability percentage used to calculate whether employer health care premiums are affordable under the Affordable Care Act (ACA) has decreased for the first time since 2015 (to 9.61% in 2022 from 9.83% in 2021). Employers subject to the ACA that do not offer affordable health plans can be assessed IRS-imposed penalties (i.e., employer shared responsibility penalties).

To qualify as an affordable offer, a calendar-year 2022 health plan must (1) offer minimum essential coverage, (2) provide minimum value and (3) make the self-only-coverage employee contribution for the lowest-cost plan offered to an employee no more than 9.61% of the employee’s household income for the plan year.

Because an employer may not know an employee’s household income, the IRS provides three affordability safe harbor options: (1) the federal poverty level (for 2021, ranges from $12,760 to $15,950, depending on the employee’s location); (2) the amount in Form W2 Box 1 (compensation); or (3) the rate of pay (hourly rate/monthly salary). As long as the self-only-coverage employee contribution for the lowest-cost plan is no more than 9.61% of one of those three amounts, the offer is considered affordable, and the employer would not be subject to employer shared responsibility penalties.

COVID-19 vaccination incentives and surcharges

Employers that add surcharges for unvaccinated employees may create a situation in which the health plan no longer meets ACA affordability rules, which could result in penalties.

Some employers are offering incentives in the form of wellness credits that lower the health care costs of employees who receive the vaccine. Other employers are proposing adding a monthly surcharge to the health insurance premiums for unvaccinated employees. Credits and surcharges are basically two sides of the same coin and have implications under many different regimes, including the ACA, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and the Americans with Disabilities Act (ADA).

In general, wellness incentives/surcharges can be no more than 30% of the total health plan cost (the total of the employer’s and employee’s contributions). Smoker/nonsmoker incentives/surcharges can raise that limit to 50%.

For ACA affordability purposes, if an employer provides incentives for tobacco cessation/reduction, the employer can use the lower nonsmoker premiums for all employees in determining affordability. For all other wellness programs not aimed at tobacco cessation/reduction, such as one encouraging vaccinations, an employer must use the higher premium when determining if the health plan satisfies an ACA affordability safe harbor (by treating all employees as though they were unvaccinated and using the higher health plan cost).

Therefore, if an employer implements a surcharge for unvaccinated employees, the basis for ACA affordability calculations would have to be increased for all employees, potentially resulting in more exposure to employer shared-responsibility penalties.

Employers offering health plan costs that normally meet ACA affordability provisions may need to conduct additional analysis when setting 2022 rates to take into account the decrease in the ACA affordability percentage. In addition, employers considering any wellness incentives or surcharges related to COVID-19 vaccines (or for any other reason) should evaluate the rate being used in the affordability calculations to make sure that the rate continues to align with plan strategy and that any increased penalty risk, if present, is fully understood.

Ron Krupa is a senior manager in EY’s National indirect tax practice with a focus on the Affordable Care Act and reporting,