August 24, 2023
ACA affordability percentage is reduced again, putting some plans at risk of noncompliance
In Revenue Procedure 2023-29, the IRS announced the new Affordable Care Act (ACA) affordability percentage of 8.39% for 2024 employer health care plans. This percentage has decreased by the greatest annual amount since its inception. This could make some health plans fail to meet an affordability safe harbor and expose employers to IRC Section 4980H(b) penalties.
Under IRC Section 36B, individuals are eligible for a premium tax credit (PTC) if, among other requirements, their employer has not offered them affordable coverage that provides minimum value (i.e., the premiums exceed an indexed percentage of household income). Current regulations consider family coverage affordable if the employee's self-only coverage is affordable.
Under IRC Section 4980H, employers can be responsible for employer shared responsibility payments (ESRPs) for any given month when: (1) an ALE fails to offer full-time employees and their dependents minimum essential coverage (MEC), and (2) ALEs offer full-time employees minimum essential coverage that is unaffordable. In both cases, an ESRP is only triggered when a full-time employee enrolls in coverage through a state or federal health care marketplace qualifying for premium support in the form of a premium tax credit (PTC) under IRC Section 36B.
ALEs have three "affordability safe harbors" to show their coverage is "affordable": (1) rate of pay (based on hourly rate or monthly salaried rate); (2) W-2 (based on gross income as reported in Box 1 on the form W-2); and (3) federal poverty line — FPL. If the amount an ALE charges an employee for self-only coverage satisfies an affordability safe harbor, the ALE will not be liable for an ESRP based on an unaffordable offer of coverage even if its employee qualifies for a PTC.
Affordability percentage decreases
An affordability percentage, indexed annually, applies to determine if an employer's self-only coverage meets the ACA's affordability requirements. In 2024, the indexing adjustment for plan years beginning on or after January 1, 2024, results in an affordability percentage of 8.39% (9.12% in 2023, 9.61% in 2022). As a result, the affordability calculation may result in a lower allowable premium.
Employers who use the FPL safe harbor will need an employee-only premium rate of $101.93 or less for plans beginning in 2024 for the lower 48 states and Washington, D.C. Employers using the Rate of Pay or W-2 safe harbors will need to evaluate their premiums considering the 8.39% threshold.
Employers that set their health insurance premiums based on ACA affordability should consider carefully reviewing their rates with their brokers and/or consultants. Because this affordability percentage decreased, an employer may end up with an unaffordable offer of coverage if 2024 health plan rates are the same as 2023. To maintain affordability, an employer may have to lower health plan rates in 2024.
Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor