The IRS released Rev Proc. 2023-29 on August 23, 2023, announcing the Affordable Care Act (ACA) affordability percentage threshold for plan years beginning January 1, 2024. This percentage is adjusted annually for inflation and will be set at 8.39% for plan years beginning January 1, 2024. This change is a significant decrease from the 2023 standard of 9.12% and the lowest this percentage has ever been set since the rules were implemented. The 2023 standard of 9.12% was a significant decrease from 2022 as well and this 2024 standard continues the reduction trend.
As a result, many employers may be required to lower their employee contribution rates for 2024 to accommodate this adjusted ACA affordability percentage.
The table below provides a historical perspective of the ACA affordability percentages since 2014:
|
Year
|
Affordability %
|
|
2014
|
9.50%
|
|
2015
|
9.56%
|
|
2016
|
9.66%
|
|
2017
|
9.69%
|
|
2018
|
9.56%
|
|
2019
|
9.86%
|
|
2020
|
9.78%
|
|
2021
|
9.83%
|
|
2022
|
9.61%
|
|
2023
|
9.12%
|
|
2024
|
8.39%
|
ACA Affordable Offer of Coverage
Under the ACA, employees are generally not eligible for a premium tax credit to buy a qualified health plan through a marketplace Exchange if their employer-sponsored health coverage is considered affordable, minimum value coverage. Minimum value coverage is determined by ensuring that the plan's share of the total allowed costs of benefits provided to the employee must be at least 60%, and the plan must provide substantial coverage of inpatient hospital and physician services.
To be considered affordable, an employee’s contribution for self-only coverage under the lowest plan cost option available cannot exceed 8.39% of the employee’s household income for the 2024 tax year. Employers exercise significant control over employee contribution rates and must satisfy ACA affordability rules to avoid penalties. Consequently, if a full-time employee of an employer subject to the ACA (an “Applicable Large Employer” or an “ALE”) receives a premium tax credit to purchase a health plan through an Exchange due to an unaffordable offer of coverage, the employer will generally be subject to certain ACA employer shared responsibility penalties.
Applicable Large Employer (ALE)
An ALE is an employer with at least 50 full-time employees, including full-time equivalent employees, on average during the prior calendar year.
ALEs include all employers within the same controlled group.
If an ALE offers multiple health plan options, affordability is determined based on the lowest-cost option for self-only coverage. This means that an offer of coverage is still deemed affordable even if an employee chooses to enroll in a higher-cost plan option as long as the lowest-cost option for self-only coverage satisfies the ACA affordability requirement. Moreover, if an ALE offers specific regional plans for employees in different states, affordability is determined based on the lowest-cost option available to the employees in those specific states/regions.
ACA Employer Shared Responsibility Penalties Quick Refresher
|
ACA Penalties
|
2024
|
2023
|
Notes
|
|
“A” Penalties
§4980H(a)
"sledgehammer" penalty
|
$2,970
|
$2,880
|
Penalty for failing to offer group health plan coverage to at least 95% of full-time employees (and their children up to age 26) for any month during the year and at least one employee enrolls in Exchange coverage with a premium tax credit.
- Based on the total number of full-time employees employed that month minus the first 30.
- Calculated on a group level.
|
|
“B” Penalties
§4980H(b)
"tack hammer" penalty
|
$4,460
|
$4,320
|
Penalty for failing to offer affordable, minimum value group health plan coverage to a full-time employee who enrolls in Exchange coverage with a premium tax credit.
- Calculated on an employee level, based on which employees receive premium tax credits.
|
IRS “Family Glitch Correction" Final Rule
Family members of employees who are not offered affordable, minimum value employer-sponsored family coverage are now eligible for a premium tax credit to purchase marketplace Exchange coverage as a result of the IRS final rule correcting the ACA “family glitch” in October 2023. This final “family glitch” rule does not affect the ACA employer mandate rules or the ACA reporting requirements, nor does it change the ACA affordability calculations for employees.
ACA Safe Harbors
The ACA affordability requirement hinges on whether or not the employee’s contribution for self-only coverage meets the required contribution percentage (8.39% for 2024) of the employee’s household income for the taxable year. Since the IRS acknowledges that ALEs are typically not aware of an employee’s household income, the IRS permits ALEs to measure the affordability of their coverage using three different ACA affordability safe harbor methods listed below:
- Federal Poverty Line (FPL) - $101.94 per month for 2024
- Rate of Pay
- Form W-2 (Box 1)
As long as an offer of coverage satisfies the ACA safe harbors listed above, the ACA employer shared responsibility will be met, avoiding penalties.
ALEs may use different ACA safe harbors for different categories of employees as long as the safe harbor is applied uniformly and consistently for all employees within that specific category. Some examples of permissible categories of employees for ACA safe harbor purposes include:
- specified job classification,
- full-time vs. part-time,
- salaried vs. hourly,
- geographic location,
- employees with or without collective bargaining agreements.
Non-Calendar Year Plans
Note that the ACA adjusted affordability percentage is applied on a plan year basis. This means that non-calendar year plans with plan years prior to January 1, 2024 will continue to base affordability calculations for employee contributions on the 2023 standard of 9.12% until their new plan year begins.
Reach out to your Risk Strategies representative with any questions or contact us directly at benefits@risk-strategies.com.
