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September 9, 2024
2024-1657

ACA affordability percentage increases after three years of decreases

  • Affordability threshold is increased to 9.02% for 2025 employer health plans.
  • The increased percentage means employers should have more flexibility in making their employee premiums meet an affordability safe harbor.
 

In Revenue Procedure 2024-35, the IRS announced the new Affordable Care Act (ACA) affordability percentage of 9.02% for 2025 employer health care plans. After three years of decreases, this percentage increase gives employers more flexibility in setting employee premiums without making their coverage unaffordable under the safe harbor.

Background

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.

An Employer Shared Responsibility Payment (ESRP) can only be 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 PTC under IRC Section 36B.

Applicable Large Employers (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 increases

An affordability percentage, indexed annually, applies to determine if an employer's self-only coverage meets the ACA's affordability requirements. In 2025, the indexing adjustment for plan years beginning on or after January 1, 2025, results in an affordability percentage of 9.02% (previously 8.39% in 2024, 9.12% in 2023, 9.61% in 2022) so the affordability calculation allows a higher premium.

Employers who use the FPL safe harbor will need an employee-only premium rate of $113.20 or less for plans beginning in 2025 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 9.02% threshold.

Implications

Employers that set their health insurance premiums based on ACA affordability should consider carefully reviewing their rates with their brokers and/or consultants.

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Contact Information

For additional information concerning this Alert, please contact:

Workforce Tax Services — Affordable Care Act Compliance

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor
 

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