[co-author: Jordan Douglas]
The Internal Revenue Service (IRS) decreased the Affordable Care Act (ACA) affordability percentage for 2024 to 8.39%. This percentage is used to assess whether an applicable large employer’s (ALE)1 lowest-premium health plan is compliant with the ACA affordability requirement. Released in late August, IRS Rev. Proc. 2023-29 set the lowest affordability percentage since the implementation of the ACA, following a three-year trend of reduction (9.83% in 2021, 9.61% in 2022, 9.12% in 2023).
Employers must evaluate their health plan contribution structure annually before open enrollment to ensure their plan is affordable. An affordable plan is one in which an ALE offers at least one health plan option where employee-only coverage is less than the affordability percentage multiplied by the employee’s household income. Three safe harbors are available to ALEs: (i) the federal poverty level (FPL), (ii) an employee’s rate of pay, or (iii) an employee’s Form W-2 compensation. ALEs may use one of these affordability safe harbors in lieu of employee household income in determining plan affordability.
Of note to employers using the FPL safe harbor, the employee contribution for the lowest-cost, employee-only coverage option is decreasing in 2024 in response to the lower affordability percentage. Under the FPL safe harbor, the employee contribution cannot exceed 8.39% of the FPL, which for 2024 in the mainland United States is $14,580 annually, or $101.94 per month (down from $103.28 per month in 2023). Employers that set employee contributions based on the exact FPL safe harbor dollar amount will need to reduce the required employee contribution for the 2024 plan year.
Employers that fail to provide affordable coverage to their employees or fail to revise their health plans to meet affordability safe harbors are subject to penalties under Internal Revenue Code (IRC) Section 4980H (b)2.
The affordability percentage applies on a plan year basis, so employers with plan years beginning after January 1, 2024, may continue to use the 2023 affordability percentage of 9.12% to determine affordability until their next plan year begins.
Many employers will no doubt be reviewing their health plans this fall to confirm that their plans are affordable and to avoid penalties.
1An applicable large employer (ALE) is defined as an employer with at least 50 full-time employees, including full-time equivalent employees, during the prior year.
2The ACA added employer shared responsibility provisions under IRC Section 4980H, mandating ALEs to offer health coverage that is affordable and that provides minimum value to their employees.