Employer Mandate, Employee Benefits Compliance, Large Employers, Penalties

Affordability Rates and Employer Mandate Penalty Amounts for 2018

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Four numbers “applicable large employers” (ALEs) need to know before finalizing plan design and employer-employee contributions for 2018 health benefits are:

  • The “affordability” percentage for 2018: 9.56%
  • The affordability amount under the FPL safe harbor: $96.08
  • The employer mandate “A” penalty for 2018: $2,320  ($193.33/month)
  • The employer mandate “B” penalty for 2018: $3,480   ($290/month)

The affordability percentage of 9.56% is down from 9.69% in 2017, and the affordability amount of $96.08 is down from $97.38 in 2017.  The two penalty amounts are up from $2,260 and $3,390 in 2017.

Although Republicans have introduced several bills that would repeal the employer mandate or reduce penalties to zero, none of these bills have been enacted yet, and it is increasingly looking like they will not be enacted in 2017. So large employers should keep the above numbers in mind when making decisions about 2018 benefits.

The affordability percentage for 2018 is in Revenue Procedure 2017-36 , and the Code § 4980H(a) & (b) penalty amounts can be calculated from the formulas in the Code and from HHS’s final rule on Benefit and Payment Parameters for 2018.

Background on Affordability

Under the Affordable Care Act’s Employer Shared Responsibility (the “employer mandate”), an ALE may be subject to a penalty if it does not offer to at least 95% of full-time employees coverage that is “affordable” and provides at least “minimum value” (i.e., actuarial value of at least 60%). The ACA provides that coverage is affordable if the employee cost for the lowest-priced self-only coverage available is not more than 9.5% (indexed annually) of the employee’s household income. Regulations allow affordability to be up to 9.5% (indexed) of one of three optional safe harbors, since employers will not actually know each employee’s household income.  The three safe harbors are: 1) W-2 method, 2) Rate-of-Pay, and 3) Federal Poverty Line. 

For example, the maximum employee contribution for 2018 is $96.08 using the Federal Poverty Line (FPL) safe harbor.  This is calculated by multiplying the most current FPL ($12,060 for 2017) by the affordability percentage (9.56% for 2018).

The 9.5% threshold in 2014 increased to 9.56% in 2015, 9.66% in 2016, and 9.69% in 2017. This decrease to 9.56% in 2018 is a reversal from the increases in prior years. This is because the affordability percentage is indexed based on the excess of the rate of premium growth for the preceding calendar year over the rate of income growth for the preceding calendar year. (See Code § 36B(c)(2)(C)(iv) and (b)(3)(A)(ii).)

Background on the Employer Mandate Penalties

The two potential employer mandate penalties are the “A” penalty and the “B” penalty, so called because they apply under Code § 4980H(a) or Code § 4980H(b).  An employer will not be subject to either of the two potential penalties unless at least one full-time employee receives a subsidy and buys health insurance in the Health Insurance Marketplace/ Exchange.

  • “A” penalty – applies if an employer does not offer at least “minimum essential coverage” (MEC) to at least 95% of full-time employees, and at least one full-time employee buys health insurance in the Marketplace and receives a subsidy. The original penalty amount in 2015 was $177.33/month times the total number of full-time employees the employer had in that month (minus 30 employees), times 12 for the entire year. (12 x $177.33 is $2,080.). The 2018 amount will be $2,320 ($193.33/month).
  • “B” penalty – applies if an employer offers coverage to employees, but for one or more full-time employees the coverage is either not “affordable” or does not meet “minimum value.” The original penalty amount in 2015 was $260/month for each full-time employee for whom coverage was either not affordable or did not provide at least minimum value. (12 x $260 = $3,120).  An important difference from the “A” penalty is that the “B” penalty calculation does not include all full-time employees, but only those for whom coverage is either not affordable or does not provide at least minimum value.  Additionally, the “B” penalty cannot be more than the “A” penalty would have been if it applied.  The 2018 amount will be $3,480 ($290/month)..