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Affordability Safe Harbors: Federal Poverty Level (2 of 3)

The IRS recently updated the affordability percentage to 9.78% for plan years that begin on or after Jan 1, 2020.  This percentage is used by applicable large employers to determine whether or not the employer’s coverage is considered affordable for an employee.

There are 3 affordability safe harbors an employer can rely upon to determine whether or not coverage is “affordable” for an employee. The 3 safe harbors include:

  1. Rate of pay

  2. Federal Poverty Level (FPL)

  3. W-2

Let's look at the Federal Poverty Level safe harbor in more detail: This safe harbor is the easiest of the three to apply because the employer only has to do one calculation, which, in this case, doesn't depend on employees' actual wages. An important consideration is that this method usually yields a higher employer contribution than Rate of Pay or W-2, since those methods are based on the employee’s actual pay.

The FPL safe harbor basically says that coverage is affordable if the employee’s portion for self-only coverage for the lowest-cost plan is at least 9.78% of whatever FPL is in affect 6 months prior to the start of the plan year. As of January 2019, FPL for an individual was set at $12,490 per year for the 48 contiguous states (Hawaii and Alaska are higher, so keep that in mind for employers that have employees in these states).  

This means a plan that begins on Jan 1, 2020 must set the employees’ portion for employee-only coverage for the lowest-cost plan at or below $101.79 per month (12,490 x 9.78% / 12). Thus, if the employees’ self-only coverage is set at $100 per month, the safe harbor is met and coverage would be considered affordable for the entire plan year.

Remember, however, that employers must decide which safe harbor to use prior to the start of the plan year, and not wait until reporting is due to figure out whether coverage was affordable or unaffordable. Doing these calculations retroactively would only tell you whether or not the premium rates you've already been charging would put you at risk of an employer mandate penalty.

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