The IRS recently released the 2024 inflation-adjusted amounts, which decreases the Affordable Care Act (ACA) employer-coverage affordability percentage from 9.12% in 2023 to 8.39% for 2024. Employers will need to consider this lower affordability threshold as they review their health plan contributions and plan for changes for their 2024 plan year.

We’ll provide a quick review of some facets of these affordability determinations and their implications as you begin strategic planning discussions for 2024.

Overview of the Employer Shared Responsibility Penalty (ESRP)

Under the ACA’s “Pay or Play” mandate, Applicable Large Employers (ALEs)—those with 50 or more full-time employees—must either (1) offer affordable health coverage that meets minimum value (MV) standards to 95% of their full-time employees (and dependent children), or (2) risk paying a tax penalty to the IRS.

To facilitate the IRS’s ability to determine if ALEs are offering affordable coverage, the ACA also imposes an annual reporting requirement upon employers/plan sponsors and insurance carriers by requiring them to file Forms 1094 and 1095. If an employer fails to offer affordable coverage to an eligible employee and the employee receives subsidized coverage (via a premium tax credit) on the , the employer would be subject to a penalty. In other words, the tax penalties would only be triggered if an employee purchases subsidized coverage in the Marketplace.

An offer of coverage is considered affordable if the employee’s premium payment for employee-only coverage does not exceed a specified percentage of household income, indexed each year. Because employers are unlikely to know each employee’s actual household income, the regulations permit the use of one of three safe harbors (federal poverty limit, rate of pay, or W-2) to determine the affordability of the coverage. A more in-depth discussion of these safe harbors and other affordability determinations is available here.

Cash-in-Lieu/Opt-Out Payments: A Minimal-Risk Option

Some employers offer a taxable cash payment to employees who decline their employer-provided health coverage (for any reason). This is also sometimes referred to as “cash-in-lieu of” benefits. However, the government wanted to avoid employees declining coverage to receive the cash payments without having other health coverage in place. Around 2016, the IRS declared that when the cash payment is unconditionally available to every employee who declines coverage, the payment amount must be included in the ACA’s affordability calculations because the employee is essentially choosing to forego additional compensation when they elect employer coverage.

To avoid this result, employers must ensure their opt-out program meets the requirements of an “eligible opt-out arrangement.” Such opt-out arrangements limit payment to only employees who (1) decline coverage, and (2) provide reasonable evidence that they already have or intend to obtain other minimum essential coverage (MEC) for themselves and their entire tax family. Most employers accept an employee’s attestation as reasonable evidence to satisfy this requirement. Note that all employer-sponsored medical plans, and many government programs such as Medicare, most Medicaid, and most Tricare coverage will satisfy the requirement to have “other MEC coverage.” However, Marketplace coverage will not satisfy this requirement.

There is minimal ESRP risk for employers that have implemented an eligible opt-out arrangement because such employees would not be eligible to receive a premium tax credit if they are covered by other minimum essential coverage.

Your Wellness Programs May Impact Affordability

Employers should also review any wellness program incentives or penalties that might impact affordability determinations.

In general, when determining the employee cost of health coverage for affordability purposes, wellness program incentives would not impact the affordability calculation. However, any wellness penalties/surcharges will be counted towards making the premiums less affordable to all employees.

The one exception to this general rule is for wellness programs that impose a surcharge for tobacco use.

The Family Glitch: This Year’s Fix Could Mean More Employees Declining Coverage

The affordability calculations above are based on the employee’s cost of coverage at the employee-only (self-only) level. It does not factor in how much an employee would have to pay for family-level coverage, which can be significantly more costly. Previously, if the employee has received an affordable offer of coverage at the self-only level, then the employee’s family members would not qualify for subsidized coverage in the Marketplace. This is referred to as the “family glitch.” Congress and the Biden Administration were able to fix the ACA’s “family glitch” so 2023 marks the first year that the affordability of an offer of coverage for dependent children and/or spouses can be considered for a dependent’s eligibility for subsidized coverage on the Marketplace.

While this new ability to qualify for subsidized coverage could result in more employees declining employer coverage for their dependents, and even themselves if they no longer need to enroll their dependents on their employer plan, this change does not increase an employer’s responsibilities under the ACA’s employer mandate.

Conclusion

In review, to avoid Employer Shared Responsibility Penalty risk employers should ensure that:

• The employee’s premium payment amount is within the ACA’s 8.39% threshold for affordability
• Any cash-in-lieu of benefits for employees who decline coverage satisfy the eligible opt-out arrangement rules
• Any wellness program surcharges (except for tobacco use) do not increase the employee’s cost of coverage beyond the affordability percentage.