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The IRS has issued Revenue Procedure 2023-29, which establishes the affordability benchmark for employer-sponsored health plans under the Affordable Care Act (ACA). The indexed contribution percentage for 2024 plan years has been set at 8.39% of household income, a significant decrease from the 2023 percentage (9.12%).

Background

• Under the Affordable Care Act (ACA), employers with more than 50 employees (applicable large employers, or ALEs) must ensure that they offer at least one health plan that offers “minimum value” as defined by the ACA and meets an established threshold for affordability.
• To meet the affordability standard, employees’ contributions for self-only coverage under the plan must be set below a given percentage of employee household income. Employers who do not meet this mandate risk being subject to penalties in the form of shared responsibility assessments.
• The employer shared responsibility provision went into effect in 2015, with some forms of transition relief offered in the first two years.
• The affordability percentage was set at 9.5% of household income in 2014 and has been indexed annually each subsequent year.
• To meet the ACA standard for affordable coverage for 2024 plan years, the employer must offer eligible employees at least one minimum value (i.e., pays for at least 60% of covered costs) plan option for which the employee’s share of the plan cost does not exceed 8.39% of household income.  

Who Is Covered

• Any employer that is an ALE is covered under the ACA’s affordability provisions.
• For the purpose of determining whether an employer is an ALE, the number of full time employees is calculated by averaging the number of full time (30+ hours/week or 130 hours/month) and full time-equivalent employees (sum of all part time employees’ hours of service in a month, up to 120 hours per employee, divided by 120) in each calendar month during the year.
• All employees are counted as either full time or full time-equivalent when determining if an employer counts as an ALE, with the following exceptions:
  • If an employer’s workforce exceeds 50 full time/full time-equivalent employees for fewer than 120 days in a calendar year, and all of the employees in excess of 50 are seasonal workers (performing work only during holiday seasons or defined as “seasonal” using the Department of Labor definition), the employer is not considered an ALE.
  • Employees who have coverage under TRICARE or a VA health program are not counted when determining if an employer is an ALE.

Affordability Safe Harbors

• Since employers are unlikely to know the household income of each employee, the ACA offers several alternative methods for applying the affordability standard using information the employer can more easily access.
  • Prior year’s W-2: affordability may be calculated using the wages reported in box 1 of Form W-2, using the following formula:

W-2 wages    

Months of coverage and months of employment are within the plan year. An entire month is counted if coverage was offered, or the employer was employed, for at least one day within the month.

• Rate of pay: affordability is calculated using the employee’s rate of pay at the beginning of the coverage period. For hourly employees, adjustments may be made if the employee’s rate of pay decreases (but not if it increases).
• Federal poverty level: affordability is calculated using the federal poverty level for a single individual. Coverage meets the affordability standard if the monthly employee contribution does not exceed the applicable percent times 1/12 of the 2023 federal poverty level for single individuals ($14,580). For 2024 plan years, the affordability threshold under this safe harbor is $101.94 per month (.0839 x 1/12 x 14,580).
• Employers may use any of the safe harbors to meet the affordability standard if at least 95% of full time employees and their dependents are offered the opportunity to enroll in minimum value coverage.
• Employers may also choose to use one safe harbor for all employees or apply different safe harbors to different categories of employees, as long as the categories used are reasonable and the same safe harbor is used for all employees within each category.

Employer Shared Responsibility Payments

• An employer must pay an employer shared responsibility payment if
  • they are classified as an ALE and fail to offer affordable coverage (or offer coverage to less than 95% of full-time employees); or
  • they are classified as an ALE and offer coverage to at least 95% of full-time employees, but not to all full-time employees, and
  • at least one full-time employee receives a premium tax credit for health coverage purchased on a Health Insurance Marketplace (“the Exchange”).
• Although only one employee has to receive a premium tax credit in order to trigger an ALE’s obligation to pay a shared responsibility payment, for ALEs that do not meet the 95% threshold, the penalty payment will be calculated based on the total number of full time employees who were not offered minimum value, affordable coverage.
• The shared responsibility payment differs based on whether the ALE meets the 95% threshold, with a significantly higher penalty for those who do not.
  • For the 2023 tax year, employers that failed to offer minimum essential coverage to at least 95% of employees for any month during the tax year, and have at least one employee who received a premium tax credit (PTC) for coverage purchased through the Marketplace, may be subject to a penalty of $240/month ($2,880 annualized) per full time employee (not including the first 30 employees).
  • For the 2023 tax year, employers that failed to offer affordable, minimum value coverage to at least 95% of employees may be subject to a penalty of $360/month ($4,320 annualized) per employee who received a PTC. Penalty rates for 2024 have not yet been announced.

Additional Information

• More information about provisions that apply to ALEs can be found at the Internal Revenue Service ACA Information Center for Applicable Large Employers.
• More specific information about the employer shared responsibility provisions and the calculation of shared responsibility payments can be found in the Affordable Care Act section of the IRS website.