In Revenue Procedure 2022-34, the IRS recently announced an important indexing adjustment related to the Affordable Care Act (ACA), providing that the ACA affordability percentage for the 2023 tax year will be 9.12%. This new ACA affordability percentage threshold is down from 2022’s percentage of 9.61%, and it is the lowest affordability percentage the IRS has set since the ACA’s Employer Mandate requirements first became effective in 2015.
Accordingly, applicable large employers (ALEs) providing health plans to their full-time workforce beginning January 1, 2023, must ensure an employee’s required contribution amount toward the lowest cost plan offered to the employee is no more than 9.12% of the threshold calculated under one of the safe harbor approaches (described below). As a reminder, an employer is an ALE if it employed an average of 50 full-time employees, including full-time equivalents, during the preceding calendar year.
The ACA affordability test is based on the employee’s share of the premium for employee-only coverage under the ALE’s lowest cost-provided plan (regardless of which plan the employee chooses) and in which the employee is eligible to enroll. Based on the IRS’ recent adjustments for the tax year 2023, ALEs will need to assess whether the coverage it offers is affordable. The IRS provides three safe harbors for ALEs to determine whether their coverage is affordable. ALE’s must apply any given safe harbor on a reasonable and consistent basis (i.e. the same safe harbor to everyone in the same bargaining group).
1) Federal Poverty Line Safe Harbor
- The employee’s required contribution toward the lowest-cost plan offered to the employee cannot exceed 9.12% of the federal poverty line for a single individual, divided by 12. ALEs may use the federal poverty line threshold in effect within six months before the first day of the plan year. The 2022 federal poverty line for a single individual in the contiguous 48 states (including D.C.) is $13,590. Therefore, in order for coverage to be affordable under this safe harbor, the employee’s required contribution cannot exceed $103.28, broken down as follows: $13,590 x 0.0912 = $1,239.40 / 12 = $103.28).
2) Rate of Pay Safe Harbor
- This safe harbor assesses the affordability percentage (9.12% for 2023) based on the rate of pay for hourly full-time employees (0.0912 x hourly rate of pay as of the first day of coverage x 130 hours) and salaried full-time employees (0.0912 x monthly salary). That calculation is then used to determine the affordability threshold. If the employee’s required contribution toward the lowest-cost, employee-only coverage offered to the employee is below the threshold, then coverage is affordable.
3) Form W-2 Safe Harbor
- The Form W-2 safe harbor provides that coverage is “affordable” if the employee’s required contribution toward the lowest-cost, employee-only coverage plan option does not exceed 9.12% (2023) of the employee’s wages on IRS Form W-2 in the “Box 1” section. This is generally the least utilized affordability safe harbor since employers may not be able to make determinations ahead of time as to whether their coverage will be “affordable” since form W-2 is not processed until year-end.
ALE’s should also note that flex credits or cash-in-lieu can negatively impact the “required contribution” amount in the above calculations. In light of the IRS’ recent indexing adjustments, ALEs should review their benefit arrangements to ensure they are still offering “affordable” coverage for the next plan year. This lower ACA affordability threshold means ALEs may need to contribute more toward employee health premiums in order to make coverage affordable.
The IRS can assess tax penalties to an ALE that offers unaffordable coverage to its ACA-defined full-time employees. The penalty is triggered when an employee purchases coverage through Covered California and receives a subsidy. The ACA penalty amounts for the 2023 tax year have not yet been released, but the penalty for offering unaffordable coverage for the 2022 tax year is $4,120 annualized, per employee who is offered unaffordable coverage.
