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IRS Increases Percentage for Determining Affordability Under the ACA for 2014

Several key reforms under the Affordable Care Act (ACA) measure the affordability of employer-sponsored health coverage. The affordability of an employer’s plan may be assessed in the following three contexts:

  • The shared responsibility penalty for applicable large employers (also known as the pay or play rules or employer mandate);
  • An exemption from the tax penalty imposed on individuals who fail to obtain health coverage (also known as the individual mandate); 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 affordability varies for each provision.

On July 24, 2014, the Internal Revenue Service (IRS) released Revenue Procedure 2014-37  (Rev. Proc. 2014-37) to index the ACA’s affordability contribution percentage for 2015.

  • For plan years beginning in 2015, employer-sponsored coverage will generally be considered affordable under both the pay or play rules and the premium tax credit eligibility rules if the employee’s required contribution for self-only coverage does not exceed 9.56 percent of the employee’s household income for the year.

However, applicable large employers using an affordability safe harbor under the pay or play rules may have to continue using a contribution percentage of 9.5 percent to measure their plan’s affordability.

  • For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate exemption if it exceeds 8.05 percent of household income.
  • Rev. Proc. 2014-37 also updates the table for determining the amount of any premium tax credit for plan years beginning in 2015.

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 shared responsibility penalty for applicable large employers 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 over the rate of income growth for the preceding calendar year.

For plan years beginning in 2015, Rev. Proc. 2014-37 adjusts this required contribution percentage to 9.56 percent.

Download the full Health Care Reform Bulletin by Clark and Associates Nevada for more details.