“Affordability” of healthcare coverage for individuals and families is defined in the provisions of the Affordable Care Act (ACA) listed below. The definition of affordability varies by provision, as noted below.

Effective date: Plan years beginning on or after January 1, 2014.

Additional Information
Individual Responsibility Penalties [Internal Revenue Code (IRC) §5000A, effective January 1, 2014]

  • Individual coverage: For an individual, coverage is considered “affordable” if the cost of the individual’s coverage does not exceed 8 percent* of the individual’s household income. Individuals are exempt from the individual penalty if coverage is unaffordable.
    • For an individual who is eligible to purchase coverage under an eligible employer-sponsored plan, the determination of affordability is based on the employee’s share of the annual premium for self-only coverage.
    • For individuals who do not have access to an eligible employer-sponsored plan, the determination of affordability is based on the self-only premium for the lowest cost bronze level coverage available in the individual market on a public exchange (i.e., Health Insurance Marketplace) serving the rating area in which the individual lives, reduced by the credit allowable under IRC §36B for the taxable year.
  • Family coverage: Family coverage is considered “affordable” if the cost of the family coverage does not exceed 8 percent* of a family member’s household income.
    • For a family eligible to purchase coverage under an eligible employer-sponsored plan, the determination of affordability is based on the employee’s share of the annual premium for family coverage.
      • If employee-only coverage is affordable, but family coverage is not, the employee is not exempt from the individual penalty, but the eligible dependents would be exempt.
    • For families that do not have access to an eligible employer-sponsored plan, the determination of affordability is based on the family premium for the lowest cost bronze level coverage available in the individual market on a public exchange (i.e., Health Insurance Marketplace) serving the rating area in which the family lives, reduced by the credit allowable under IRC §36B for the taxable year.
    • *The “8 percent of household income” figure is subject to change each year to reflect the rate of premium growth over the rate of income growth.
    • Note: There are other individuals who are exempt from the Individual Responsibility Penalties.

Premium Subsidies (tax credits and cost-sharing reductions) (IRC §36B)

  • Tax credits will be available to eligible individuals to purchase coverage on the new Health Insurance Marketplaces. An individual is eligible for credits if his or her income is between 100 percent and 400 percent of the federal poverty level based on household size (unless he of she qualifies for Medicaid).
  • If employed and if he or she has access to employer-based coverage, an individual will have to demonstrate that the coverage is unaffordable by showing the premiums exceed 9.5 percent of household income 9.56 percent for 2015), or the plan does not meet Minimum Value requirements.
  • Cost-sharing reductions will be available for families with incomes at or below 250 percent of the federal poverty level.

Employer Shared Responsibility Penalties (IRC §4980H)

  • Individual coverage: Coverage for an employee under an eligible employer-sponsored plan is deemed “affordable” if the employee’s share of the premium for self-only coverage does not exceed 9.5 percent of the employee’s household income. There are three safe harbors employers can use to determine affordability if household income cannot be determined by the employer: the employee’s W-2 wages, rate-of-pay equivalent income or the federal poverty level (FPL) for a single individual ($11,670 in 2014). If multiple healthcare coverage options are offered to the employee, the affordability test will be applied to the lowest-cost option available.
  • Family Coverage: Coverage for an employee and his or her eligible dependents under an eligible employer-sponsored plan is “affordable” based on the same determination as that used for individual coverage (see above).