How Is Affordable Care Coverage Calculated for IRS Taxes 2018?
Understanding how affordability is calculated for Affordable Care Act (ACA) coverage is essential for determining whether you were required to maintain minimum essential coverage for the 2018 tax year and whether you might have been eligible for an exemption from the individual shared responsibility payment. In 2018, the IRS used a specific affordability threshold to determine whether the lowest-cost coverage available to you was considered affordable. If it was not affordable, you could qualify for an exemption, and if it was affordable and you still went uninsured, you could be liable for a penalty. While the individual mandate penalty was reduced to $0 for 2019 onward at the federal level, the 2018 tax year still had a penalty for those who did not maintain coverage and did not qualify for an exemption. That is why calculating affordability for IRS taxes in 2018 mattered so much.
Affordability in the IRS Context
Affordability is not a generic judgment call. It is a defined metric set by the IRS and indexed annually. For 2018, the affordability threshold was 8.05% of household income. If the cost of the lowest-priced coverage available to you exceeded 8.05% of your household income, the coverage was considered unaffordable. This calculation can apply to employer-sponsored coverage, marketplace plans, or other options depending on your circumstances. The IRS used the threshold to decide whether the individual shared responsibility payment applied or whether you could claim an exemption based on affordability.
Key 2018 Affordability Percentage
The core of the affordability formula is straightforward:
- Determine household income for tax purposes.
- Identify the annual premium for the lowest-cost available plan that provides minimum essential coverage.
- Divide the annual premium by household income to find the affordability percentage.
- If the percentage is greater than 8.05%, coverage is considered unaffordable in 2018.
| Tax Year | Affordability Threshold | Implication |
|---|---|---|
| 2017 | 8.16% | Coverage unaffordable if premium exceeds 8.16% of household income. |
| 2018 | 8.05% | Coverage unaffordable if premium exceeds 8.05% of household income. |
| 2019 | 8.30% | Federal penalty set to $0 but affordability still used for certain exemptions. |
What Counts as Household Income in 2018?
Household income is not just the sum of the wages of the primary taxpayer. For IRS ACA calculations, household income typically includes the modified adjusted gross income (MAGI) for you, your spouse if filing jointly, and any dependents who must file a tax return. This matters because the affordability calculation is a ratio, and a larger household income lowers the percentage of income spent on premiums. In 2018, MAGI for ACA purposes included adjusted gross income plus non-taxable Social Security benefits, tax-exempt interest, and foreign earned income that was excluded from gross income.
Determining the Lowest-Cost Plan for Affordability
The “lowest-cost plan” depends on the source of coverage. For employer-sponsored coverage, affordability is based on the employee’s required premium contribution for the lowest-cost self-only coverage that meets minimum value. Even if you are enrolling your family, the affordability test for the individual mandate may still use the employee-only cost. This is one reason the “family glitch” was a significant issue in 2018. For Marketplace coverage, you use the lowest-cost plan available to you in your region that provides minimum essential coverage, typically a bronze plan.
Annualizing the Premium
If you only have a monthly premium, you must annualize it by multiplying by 12. If you had coverage available for only part of the year, you may need to calculate affordability on a month-by-month basis. The IRS also allowed certain safe harbor methods for employers to determine affordability, such as using the W-2 wage safe harbor, the rate of pay safe harbor, or the federal poverty line safe harbor.
Why 2018 Was Unique
The 2018 tax year was the last year the federal individual mandate penalty applied. Although the Tax Cuts and Jobs Act reduced the penalty to $0 starting in 2019, taxpayers filing 2018 returns still had to account for months without coverage unless they qualified for an exemption. That made the affordability calculation especially important. Many taxpayers realized that they did not have to pay the penalty if the coverage available to them was not affordable by IRS standards. This is why accurate affordability calculations can impact your tax filing outcomes.
Monthly vs. Annual Affordability
The IRS affordability test can be applied monthly. If the coverage is unaffordable for certain months, you may be exempt for those months only. This monthly approach is particularly relevant for people with fluctuating income or those who experienced job changes. Even if your annual premium might seem affordable on an annual basis, monthly affordability can vary when income is not stable.
| Monthly Income | Monthly Affordability Threshold (8.05%) | Example Monthly Premium | Affordable? |
|---|---|---|---|
| $2,500 | $201.25 | $230 | No |
| $4,000 | $322.00 | $300 | Yes |
| $6,000 | $483.00 | $450 | Yes |
How the IRS Uses Affordability to Determine Exemptions
One of the main reasons the affordability calculation matters is that it determines eligibility for the affordability exemption. If the lowest-cost coverage available to you was more than 8.05% of household income in 2018, you could claim the exemption. This exemption could be claimed on your tax return without prior approval from the Marketplace, or you could request an exemption certificate from the Marketplace itself.
Common Scenarios Where Coverage Is Unaffordable
- Self-employed individuals who purchase unsubsidized coverage in a high-cost region.
- Employees with access to employer-sponsored coverage that is expensive relative to their wages.
- Households with seasonal income where a few months have low earnings.
Connecting Affordability to Premium Tax Credits
Premium tax credits (PTC) are designed to make coverage more affordable for households with income between 100% and 400% of the federal poverty level (FPL), and in 2018, the size of the credit depended on how much of your income you were expected to pay toward premiums. The affordability threshold for the mandate is separate from the percentage used to compute PTC, but both are rooted in income and annual premium amounts. A household could have coverage considered affordable for the mandate and still receive a premium tax credit, or vice versa, depending on the plan selected and their income level.
2018 Federal Poverty Level Context
The FPL is another common benchmark for ACA calculations. While the affordability test uses household income directly, many ACA-related benefits are tied to the FPL. The table below provides the 2018 FPL values for the contiguous 48 states and DC. These are useful for estimating premium tax credit eligibility, even though the affordability test is a separate calculation.
| Household Size | 2018 FPL (48 States/DC) |
|---|---|
| 1 | $12,140 |
| 2 | $16,460 |
| 3 | $20,780 |
| 4 | $25,100 |
| 5 | $29,420 |
Step-by-Step Guide to Calculating Affordability
1) Gather Income Data
Start with your household MAGI for 2018. If you are preparing a return, use the actual MAGI. If estimating, use the best available income records, including any non-taxable Social Security benefits and tax-exempt interest.
2) Identify the Relevant Premium
For employer-sponsored plans, use the employee-only premium for the lowest-cost plan that meets minimum value. For Marketplace plans, use the annual premium for the lowest-cost plan available to you. This is commonly the lowest-cost bronze plan in your county and age band.
3) Calculate the Percentage
Divide the annual premium by household income. Multiply by 100 to get a percentage. Compare this to the 2018 affordability threshold of 8.05%.
4) Interpret the Result
If the premium percentage is above 8.05%, the coverage is considered unaffordable for 2018. You may qualify for an exemption, and the individual mandate penalty should not apply for the months in question.
Practical Example
Imagine a household with a 2018 MAGI of $45,000. The lowest-cost coverage available is $4,000 per year. Divide $4,000 by $45,000, which equals 0.0889 or 8.89%. Since 8.89% is greater than 8.05%, the coverage is unaffordable. The household would likely qualify for an affordability exemption for the months when that was the case. If the premium were $3,200 instead, the percentage would be 7.11%, making it affordable, and the exemption would not apply.
Documentation and IRS Guidance
The IRS provided guidance on the affordability threshold and exemptions in multiple resources. These include the instructions for Form 8965 and IRS publications related to ACA compliance. It’s critical to reference official sources to understand nuances such as exemptions, household income definitions, and the way employer-sponsored plans are evaluated. Here are authoritative references that support the calculations and thresholds discussed:
- IRS Affordable Care Act for Individuals and Families
- HealthCare.gov Exemptions Information
- IRS Publication 974 (Premium Tax Credit)
Common Questions and Misconceptions
Is the affordability percentage the same for everyone?
Yes, for the 2018 tax year the affordability threshold was 8.05% for all households. However, the resulting affordability depends on your income and the premium amount, which can vary based on location, age, and coverage options.
Does the premium tax credit affect affordability?
For the individual mandate, affordability often used the premium net of employer contributions or the gross premium for marketplace plans available to you. In some cases, the availability of premium tax credits can affect the net cost, which can change affordability in practice. It’s important to understand whether the comparison should use the gross premium or the premium after subsidies, which can be complex and depend on specific rules and circumstances.
What if I only had coverage available part of the year?
If coverage was only available part of the year or your income changed significantly, use a month-by-month calculation. This can result in an exemption for certain months even if the full-year calculation would suggest affordability.
Why Accurate Calculations Matter for 2018 Taxes
The individual shared responsibility payment for 2018 could be significant. The penalty generally was the greater of a percentage of income above the filing threshold or a flat dollar amount per person, subject to a cap. Therefore, correctly determining whether coverage was affordable could materially affect your tax liability. Even if you are filing years later, accurate affordability calculations may be relevant for amended returns, state-level requirements, or reconciliation of premium tax credits.
Final Takeaways
In 2018, affordable care coverage was calculated using a straightforward formula: the annual premium for the lowest-cost available plan divided by household income, compared to the 8.05% affordability threshold. This calculation influenced whether you were subject to the individual shared responsibility payment or eligible for an exemption. It remains a key concept for understanding ACA policy and for interpreting historic tax-year compliance. Use the calculator above to evaluate your own situation, but always verify with official sources when filing or amending a return.