Big ACA Affordability Threshold Drop for 2024

The IRS issued Revenue Procedure 2023-29, which announces that the Affordable Care Act (ACA) affordability threshold is decreased to 8.39% for 2024 from 9.12% for 2023.  This is big news for employers subject to the ACA employer mandate because it potentially lowers the cost at which a self-only coverage option must be available under a group health plan to avoid the possibility of a penalty on the employer. It requires employers to, at the very least, do an assessment of cost sharing and may require cost design changes for the 2024 plan year.

The ACA Employer Mandate and ACA Affordability Requirement

The ACA “formula” provides that an applicable large employer must offer each full-time employee and his/her dependents the opportunity to enroll in minimum essential coverage that satisfies a “minimum value” standard and is “affordable” or be exposed to penalties.

ACA affordability is based on the lowest cost, self-only coverage option under a health plan. This requires analyzing the employee required contribution for the lowest cost, self-only coverage to make sure it does not exceed a certain amount.

Under the ACA itself, the percentage is based on of the employee’s household income (initially set at 9.5% in 2014, adjusted for inflation). In response to employers’ concerns about having to obtain the household income amount of their employees, the IRS provided 3 safe harbors that are much more administratively workable for employers.  These safe harbors include the following:

1. W-2 Safe Harbor. Generally, an employer meets this safe harbor if the lowest cost, self-only coverage that provides minimum value during the entire calendar year does not exceed the annual IRS-specified percentage of the employee’s Form W-2 wages from the employer for the calendar year.
2. Rate of Pay Safe Harbor. Coverage will be deemed affordable if the employee’s monthly contribution is equal to or less than the IRS-specified percentage of monthly wages. For hourly employees, monthly wages are determined by multiplying the employee’s hourly rate times 130. For salaried employees, the employee’s monthly salary is used.
3. Federal Poverty Line Safe Harbor. An employer satisfies this safe harbor if the employee’s required contribution for the lowest cost, self-only coverage that provides minimum value does not exceed the IRS-specified percentage of the federal poverty line for a single individual for the year.

Penalties

If an applicable large employer fails to offer affordable coverage for one or more full-time employees, then the employer is subject to the Employer Shared Responsibility Payment for each full-time employee for which coverage is not affordable and the employee obtains subsidized Marketplace coverage. Like the affordability threshold, this penalty amount is indexed for inflation. The initial penalty amount of $3,000 (in 2015) is now $4,460 for 2024 (please remember that while the penalty is stated as an annual amount, it is determined on a monthly basis).

Practice Pointer

Plan sponsors should take immediate action to determine if their 2024 plan design for premium cost-sharing meets the new affordability threshold given this meaningful decrease in the percentage.

2023 and 2024 Safe Harbors

If you have any questions about ACA compliance, including the new ACA affordability provisions, please contact any member of our Employee Benefits and Executive Compensation practice group.