ACA Affordability Percentage for 2023
The IRS has announced the Affordable Care Act (ACA) affordability percentage for plan years beginning in calendar year 2023. The percentage is 9.12%–which is significantly lower than last year (9.61%) and is in fact the lowest percentage since the rules took effect in 2015.
What does mean for employers? The affordability percentage is used by “applicable large employers” (ALEs) to calculate how much they will ask employees to contribute toward the cost of their health coverage. The new percentage applies to plan years beginning in calendar year 2023 (which includes employers with calendar year plans). An important point to keep in mind:
- The decrease in the affordability percentage could mean that some employers will have to lower the amount their employees are asked to contribute toward the cost of health coverage during the upcoming plan year.
For reference, the affordability percentage over the years has been:
Are you an ALE? The affordability percentage is important to you if you are an ALE. An employer is an ALE if the employer averaged at least 50 full-time employees, including full-time equivalent employees, during the prior calendar year. The Internal Revenue Service (IRS) has outlined a methodology for making this determination. A few points to keep in mind:
- The hours for part-time employees (a.k.a. full-time equivalent employees) must be counted.
- An employer’s status as an ALE may change from year-to-year due to new hires, reductions in staff, or mergers and acquisitions.
- The law treats employers in an aggregated (control) group as a single employer for determining ALE status.
- In California, employers with 100 or fewer employees are eligible for small group coverage. Therefore, an employer with between 50 and 100 employees may be an ALE for ACA purposes, even though the employer is covered by a small group policy under California rules.
What does it mean to be an ALE? First, ALEs may be subject to an employer shared responsibility payment under section 4980H(a) or 4980H(b) of the Internal Revenue Code (IRC). To avoid the 4980H(a) payment, ALEs must offer at least 95% of their full-time employees (and their dependents) “minimum essential coverage” (MEC). To avoid the 4980H(b) payment, that MEC coverage must also be “minimum value” (MV) and “affordable.” If the employer does not meet these standards, and just one full-time employee obtains coverage and a “premium tax credit” (PTC) from a Marketplace—such as Covered California—the employer may receive a Letter 226J from the IRS assessing a 4980H payment.
Second, ALEs must satisfy the Form 1094/1095 reporting requirement. (Small employers that self-fund must also satisfy the reporting requirement, but they comply using the B series forms rather than the C series forms.) An important tip:
- Several jurisdictions—California, the District of Columbia, Massachusetts, New Jersey, Vermont, and Rhode Island—have an individual coverage mandate. To enforce the mandates, these states may require employers to furnish and file forms or data with state agencies (similar to the federal 1094/1095 reporting requirement). If you have employees in these jurisdictions, you need to be aware of any additional reporting mandates that may apply to you.
What are the 4980H(a) and (b) payment amounts for 2023? The 4980H(a) and (b) employer shared responsibility payment amounts adjust each year. The 2023 amounts have not yet been announced. For reference, these are the applicable payment amounts since the employer shared responsibility mandate took effect:
How does an employer know if the coverage it offers is affordable? When setting contribution rates prior to open enrollment season, the ALE should consider section 4980H(b). To avoid a section 4980H(b) employer shared responsibility assessment, the ALE must ensure that the maximum amount it requires an employee to contribute toward the cost of self-only coverage for the employer’s lowest cost MV plan is “affordable.” This is where the affordability percentage comes into play.
Employer-provided coverage is considered affordable if the amount the employee is required to pay for self-only coverage for the employer’s lowest cost MV plan does not exceed a certain percentage of the employee’s household income. For this purpose, the employee’s required contribution includes amounts paid either pre-tax or post-tax, and takes into account the effects of employer arrangements such as health reimbursement arrangements (HRAs), wellness incentives, flex credits, and opt-out payments.
Since ALEs do not have access to their employees’ household incomes, the IRS has created three affordability safe harbors employers can use to establish affordability: federal poverty line (FPL), rate of pay, and W-2. According to the IRS, “If an ALE’s offer of coverage is affordable using any of these safe harbors . . . then, the offer of coverage is deemed affordable for purposes of the employer shared responsibility provisions regardless of whether it was affordable based on the employee’s household income (which is the test that applies for purposes of the premium tax credit).”
The safe harbor calculations must be re-done each year, as plan cost and contribution levels fluctuate, and the affordability percentage adjusts (as noted above, it is 9.12% for 2023). Some examples may help. Applying the new affordability percentage for the 2023 plan year, an employer in California relying on the FPL safe harbor could not ask an employee to pay more than $103.28 per month for self-only coverage (based on the 2022 FPL of $13,590 for a one-person household in the 48 contiguous states and D.C.). (In contrast, in 2022, using the 2022 FPL and the 2022 affordability percentage, an employer could not ask an employee to contribute more than $108.83 per month.) If the employer is relying upon the rate of pay safe harbor for the 2023 plan year, for an employee earning $15 per hour, the employer could not ask that employee to contribute more than $177.84 per month toward the cost of self-only coverage.
Some important points to keep in mind:
- To avoid section 4980H(a) and (b) shared responsibility payments for 2023, ensure that the coverage offered to full-time employees is MEC, MV, and affordable. Coverage must also be offered to dependents (but it does not have to be offered to spouses).
- MEC coverage must be offered to at least 95% of full-time employees.
- For employers relying on the rate of pay safe harbor, contribution rates will have to reflect any increase in the applicable minimum wage if the increase affects affordability calculations (including increases in applicable municipal wage rates).
- For employers relying on the FPL safe harbor, it is important to remember that the FPL is adjusted each year—but the new numbers are not released until January, which is too late for an employer calculating contributions for a calendar year plan. However, when calculating the contribution amount under the FPL safe harbor, employers may use the FPL in effect within six months before the first day of the plan year. Therefore, for employers with calendar year plans, the 2022 levels may be used (the 2022 FPL is $13,590 for a one-person household in the 48 contiguous states and D.C.).
- ALEs should document (among other items) their safe harbor methodology and affordability calculations so they are prepared in the event of an IRS audit. The Summary of Benefits and Coverage (SBC) confirms whether the plan is MEC and MV. A copy of the SBC should be retained for audit purposes.