For plan years beginning in 2019, the ACA’s affordability contribution percentages are increased to:

• 9.86 percent under the pay or play rules
• 9.86 percent under the premium tax credit eligibility rules
• 8.3 percent under an exemption from the individual mandate

Important Dates

• May 21, 2018 – Rev. Proc. 18-34 increased the ACA’s affordability contribution percentages for 2019.
• January 1, 2019 – The updated percentages are effective for taxable plan years beginning Jan. 1, 2019.

Overview

On May 21, 2018, the Internal Revenue Service (IRS) issued Revenue Procedure 2018-34 to index the contribution percentages in 2019 for purposes of determining affordability of an employer’s plan under the Affordable Care Act (ACA). For plan years beginning in 2019, employer-sponsored coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed:

• 9.86 percent of the employee’s household income for the year, for purposes of both the pay or play rules and premium tax credit eligibility; and
• 8.3 percent of the employee’s household income for the year, for purposes of an individual mandate exemption (adjusted under separate guidance).

Action Steps

These updated affordability percentages are effective for taxable years and plan years beginning Jan. 1, 2019. This is a significant increase from the affordability contribution percentages for 2018. As a result, some employers may have additional flexibility with respect to their employee contributions for 2019 to meet the adjusted percentage.

Overview of the Affordability Requirement

Under the ACA, the affordability of an employer’s plan may be assessed in the following three contexts:

• The employer shared responsibility penalty for applicable large employers (also known as the pay or play rules or employer mandate);
• An exemption from the individual mandate tax penalty for individuals who fail to obtain health coverage; and
• The premium tax credit for low-income individuals to purchase health coverage through an Exchange.

Although all of these provisions involve an affordability determination, the test for determining a plan’s affordability varies for each provision.

The IRS previously adjusted the affordability contribution percentage for 2015 in Rev. Proc. 14-37, for 2016 in Rev. Proc. 14-62, for 2017 in Rev. Proc. 16-24, and for 2018 in Rev. Proc. 17-36. The adjusted affordability contribution percentage for purposes of the individual mandate exemption is separately announced in the Notice of Benefit and Payment Parameters final rule for each year.

Affordability Adjustments

This chart illustrates the adjusted affordability percentages for each purpose since 2014. Each provision is described in more detail following the chart.

Affordable Employer-sponsored Coverage

Under the ACA, employees (and their family members) who are eligible for coverage under an affordable employer-sponsored plan are generally not eligible for the premium tax credit. This is significant because the ACA’s employer shared responsibility penalty for applicable large employers (ALEs) is triggered when a full-time employee receives a premium tax credit for coverage under an Exchange.
To determine an employee’s eligibility for a tax credit, the ACA provides that employer-sponsored coverage is considered affordable 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. After 2014, this required contribution percentage is adjusted annually to reflect the excess of the rate of premium growth.

Employer Shared Responsibility Rules

The ACA’s employer shared responsibility or pay or play rules require ALEs to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty.
These 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 was considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage did not exceed 9.5 percent of the employee’s household income for the tax year.
This affordability contribution percentage was adjusted to:

For 2019, Rev. Proc. 18-34 increases the affordability contribution percentage to 9.86 percent. This means that employer-sponsored coverage for the 2019 plan year will be considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage does not exceed 9.86 percent of the employee’s household income for the tax year.
Employers may use an affordability safe harbor to measure affordability of their coverage. The three safe harbors 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. IRS Notice 2015-87 confirmed that ALEs using an affordability safe harbor may rely on the adjusted affordability contribution percentages for 2015 and future years.
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.

Individual Mandate Exemption

The ACA’s individual mandate requires most individuals to obtain acceptable health coverage for themselves and their family members or pay a penalty. However, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption:

• Coverage is affordable for an employee if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income (as adjusted).
• Coverage is affordable for family members if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income (as adjusted).

This affordability contribution percentage was adjusted to 8.05 percent for plan years beginning in 2015, 8.13 percent for plan years beginning in 2016, 8.16 percent for plan years beginning in 2017, and 8.05 percent for plan years beginning in 2018.

The tax reform bill, called the Tax Cuts and Jobs Act, reduced the ACA’s individual mandate penalty to zero, effective beginning in 2019. As a result, beginning in 2019, individuals will no longer be penalized for failing to obtain acceptable health insurance coverage. However, the 2019 Notice of Benefit and Payment Parameters final rule notes that individuals may still need to seek this exemption for 2019 and future years (for example, in order to be eligible for catastrophic coverage).

As a result, the final rule increases the required contribution percentage in 2019. For 2019, an individual qualifies for this affordability exemption if he or she must pay more than 8.3 percent of his or her household income for minimum essential coverage.

Premium Tax Credit

The ACA provides premium tax credits to help low-income individuals and families afford health insurance purchased through an Exchange. The amount of a taxpayer’s premium tax credit is determined based on the amount the individual should be able to pay for premiums (expected contribution).

The expected contribution is calculated as a percentage of the taxpayer’s household income, based on the FPL. This percentage increases as the taxpayer’s household income increases and is indexed each year after 2014, as follows:

*This Compliance Bulletin is not intended to be construed as legal advice. Readers should contact legal counsel for legal advice.

Under Section 1332 of the Affordable Care Act (ACA), states can receive permission to waive key provisions of the law in order to implement innovative, alternate health coverage rules or programs while retaining basic consumer protections. States can apply for the five-year waivers through the Department of Health and Human Services (HHS).

What can and cannot be waived 
In the application, states can request to waive or modify any or all of the following ACA provisions.

• Individual and/or employer mandate penalties*
• Essential Health Benefits (EHBs) and cost-sharing requirements 
• Premium tax credits and cost-sharing reductions
• Standards for Marketplaces
• “Plan categories” (or metal levels) on Marketplaces 

Waivers cannot be used to modify or eliminate other patient protections, such as prohibiting annual or lifetime limits or charging higher premiums for those with preexisting conditions.

Waiver guardrails
States seeking a 1332 waiver must demonstrate that its innovation plan stays within certain waiver “guardrails.”

• Comprehensiveness: The coverage must be as comprehensive as coverage available on the public Marketplaces.
• Affordability: The coverage must provide protections against excessive out-of-pocket spending and be as affordable as coverage offered through the public Marketplaces.
• Scope of coverage: Coverage must be accessible to at least as many people as the ACA would cover without the waiver. 
• Deficit neutral: The coverage must not increase the federal deficit.

Federal funding 
As part of the application, states can request a subsidy pass-through to assist with funding the plan. The pass-through provides the state with funds equal to the total premium tax credits, cost-sharing reductions (CSRs) and small business credits that residents would otherwise have received from the Marketplace.

Expenses above and beyond what can be covered using pass-through funding must be provided for at the state level. States are proposing different ways to cover the difference, some of which could affect insured and self-insured employer plans.

Waiver activity
Section 1332 was effective Jan. 1, 2017. Since that time, four state waivers have been approved.

• Alaska (effective 2018-2022): Waives single risk pool requirement to implement a reinsurance program.
• Hawaii (effective 2017-2021): Waives Small Business Health Options Program (SHOP) requirement and related provisions that conflict with Hawaii’s more comprehensive Prepaid Health Care Act.
• Minnesota (effective 2018-2022): Waives single risk pool requirement to implement a reinsurance program.
• Oregon (effective 2018-2022): Waives single risk pool requirement to implement a reinsurance program.

Additional states considering applying for 1332 waivers in 2018 include: