Updated 10/23/2023
Despite all the efforts to repeal the Affordable Care Act (ACA), employers should know that the ACA employer mandate remains in full force, and will likely remain so for a while. A key component of that employer mandate is offering affordable healthcare coverage to eligible full-time employees.
Affordable Healthcare Coverage Defined
Under the ACA, ALEs (Applicable Large Employers) must periodically (usually monthly) offer at least 95% of their eligible full-time employees quality health insurance coverage, and fulfill all ACA reporting requirements around that, or risk paying penalties.
Qualifying plans must offer:
- Minimum Essential Coverage (MEC)
- Minimum Value (MV): the plan must pay at least 60% of the costs of covered benefits
- Affordable Coverage: A plan is considered affordable if the employee’s required contribution for the lowest cost self-only health insurance option offered by the employer does not exceed 9.12% (2023)* of the employee’s household income. This applies even if the employee selects a different health insurance coverage option.
*Note: The IRS adjusts this amount annually based on the federal poverty line percentage.
Each of these requirements has its own intricacies, so it’s best to consult with a knowledgeable insurance broker before choosing a plan for your company. They will be able to tell you if the plan meets MEC and MV standards.
Let’s dive a little deeper on the affordability aspect of these plans.
What is “Affordable?”
When applying ACA tax regulations to Tax Year 2023, “affordable” means that the employee’s share of self-only health coverage cannot exceed 9.12% of household income.
The ACA affordability percentage is written in the Internal Revenue Code as *9.56%, but subsequent IRS guidance hinted at adjustments for inflation and sure enough:
- 9.78% for Tax Year 2020
- 9.83 % for Tax Year 2021
- 9.61% for Tax Year 2022
- 9.12% for Tax Year 2023
So, one way to do ACA affordability calculations is: for calendar-year plans using the federal poverty level (FPL) safe harbor (see below) to determine affordability, an employee’s premium payment can’t exceed $110.81 per month.
The 3 Affordability Safe Harbors for Employers
Since employers often don’t know their workers’ household incomes, the IRS allows the employer to use one or all three of these tests for affordability, any of which can be used in place of household income:
- W-2 Wages safe harbor
- Rate-of-Pay safe harbor
- Federal Poverty Line (FPL) safe harbor
Just one safe harbor per plan. Employers with multiple plans can apply different safe harbors to different plans – they need not be identical.
Read more about the ACA affordability safe harbors.
What are the penalties associated with this?
If an employee’s share of the premium for the lowest cost self-only option offered by the employer is more than 9.12% (2023) of his or her household income, the coverage is not considered affordable for that employee and the ALE member may be liable for an employer-shared responsibility penalty under Section 4980(b) if that employee obtains a premium tax credit for health coverage purchased through the marketplace.
The original $3,000 amount associated with this penalty has been adjusted each calendar year after 2014.
- For 2023, the penalty amount is $4,320 per employee per year.
Note that this is the penalty for not offering affordable coverage and that this penalty applies to all employees, not just the one that was not offered affordable coverage!
There are other ACA penalties:
- Penalties for not offering MEC and MV coverage
- Reporting penalties for not documenting ACA compliance
Read more about ACA employer penalties.
Takeaway for employers?
Employers need to keep a close eye on employee contributions (or the relative share of plan cost reflected in employee contributions) to maintain “affordable” coverage under the ACA.
Employers should also consider the affordability standard in developing their health care plan cost-sharing strategies.
Integrity Data can guide you in understanding the ACA employer reporting requirements, including how to test for affordability and avoid costly penalties.
Contact our ACA compliance team today.
Are You Sure Your Company Health Plans Comply with ACA Affordability Requirements?
Use our free ACA affordability calculator to determine if your healthcare plans meet all ACA regulations.
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