IRS Releases ACA Affordability Rates for 2023

The IRS released Rev Proc. 2022-34 on August 1, 2022, announcing the Affordable Care Act (ACA) affordability percentage threshold for plan years beginning January 1, 2023. This percentage is adjusted annually for inflation and will be set at 9.12% for plan years beginning January 1, 2023. This change is a significant decrease from the 2022 standard of 9.61% and the lowest this percentage has ever been set since the rules were implemented.

As a result, many employers may be required to lower their employee contribution rates for 2023 to accommodate this adjusted ACA affordability percentage.

The table below provides a historical perspective of the ACA affordability percentages since 2014:

ACA Affordable Offer of Coverage

Under the ACA, employees (in addition to their family members^[1]) 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^[2] coverage.

To be considered affordable, an employee’s contribution for self-only coverage under the lowest plan cost option available cannot exceed 9.12% of the employee’s household income for the 2023 tax year. Employers typically exercise significant control over employee contribution rates to satisfy ACA affordability rules. Consequently, if a full-time employee of an employer subject to the ACA (an “Applicable Large Employer” or an “ALE”^[3]) receives a premium tax credit to purchase a health plan through an Exchange due to an unaffordable offer of coverage, that ALE will generally be subject to certain ACA employer shared responsibility penalties.

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 analysis. 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 Safe Harbors

As mentioned above, the ACA affordability analysis hinges on whether or not the employee’s required contribution for self-only coverage exceeds the required contribution percentage (9.12% for 2023) 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)

• Rate of Pay

• Form W-2 (Box 1)

As long as an offer of coverage satisfies the ACA safe harbors listed above, it will be considered affordable to avoid certain ACA employer shared responsibility penalties. ALEs can 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^[4].

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, 2023 will continue to base affordability calculations for employee contributions on the 2022 standard of 9.61% until their new plan year begins.

As with previous years, your Risk Strategies account teams are already working diligently to model employee contributions for ALEs in compliance with this new ACA affordability rate for plan years beginning on or after January 1, 2023. Reach out to your team members with further questions.

[1] Click here for a prior blog post on a proposed rule to correct the ACA “family glitch” that would, if finalized, affect the eligibility of employees’ family members to receive a premium tax credit in 2023.

[2] To be considered a minimum value plan, the plan’s share of the total allowed costs of benefits provided to the employee must be at least 60 percent and the plan must provide substantial coverage of inpatient hospital services and physician services.

[3] An ALE is an employer with at least 50 full-time employees, including full-time equivalent employees, on average during the prior calendar year. Note that ALEs include all employers within the same controlled group.

[4] Some examples of acceptable categories of employees include, but are not limited to, specified job classification, full-time v. part-time, salaried v. hourly, geographic location, employees with and without collective bargaining, etc.