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2024 ACA Affordability Percentages Announced (and why benefits pros should be paying attention)

Updated: Jun 5

IRS Update on Affordability Percentage for Employers - what it is and why it matters

The Internal Revenue Service (IRS) has recently released an update regarding the affordability percentage for employer-sponsored health coverage. This update is particularly important for applicable large employers (ALEs), which are generally employers with 50 or more full-time employees or equivalents.

In this update, the IRS has revised the affordability percentage from 9.12 percent to 8.39 percent. This change will take effect for ALE's plan years commencing on or after January 1st, 2024.

What is the Affordability Percentage? The affordability percentage is a crucial factor in determining whether an ALE's health coverage is considered "affordable" under the Affordable Care Act (ACA). If the employee's share of the premium for self-only coverage exceeds the affordability percentage of their household income, the coverage may be deemed unaffordable, placing the employer at significant risk of receiving a penalty letter from the IRS. Many of the issues we see with employers regarding ACA penalties surround a misunderstanding or miscalculation of affordability percentages.

Implications of the Updated Affordability Percentage With the reduction in the affordability percentage, ALEs need to ensure that their coverage remains affordable by utilizing one of the three safe harbors:

This adjustment will result in employers contributing more towards employee coverage while reducing the financial burden on employees, particularly those teetering on the affordability threshold.

Practical Example of Calculating Affordability

  • Let's say an employer is using the Rate of Pay Safe Harbor, and the lowest-paid employee earns $10 per hour.

  • The calculation would involve multiplying $10 by 130 hours per month, resulting in a monthly income of $1,300.

  • The coverage cost should not exceed 8.39 percent of the monthly income, which would be $109.07 ($1,300 x 0.0839).

  • This figure represents a decrease from the previous affordability threshold, indicating lower costs for employees - but higher costs (generally speaking) for employers.

Ensuring Compliance and Adherence to Safe Harbor Guidelines It is imperative for ALEs to align their affordability calculations with the updated 8.39 percent rate for the entirety of their plan year. Additionally, ensuring that the chosen safe harbor aligns with the corresponding codes is essential for accurate compliance.

  • Employers should review their safe harbor methodologies and make necessary adjustments to comply with the new affordability percentage.

  • Proper communication with employees about any changes to their premium contributions is also recommended.

Additional Context The affordability percentage is one of the key factors used to determine whether an ALE may be subject to potential penalties under the ACA's employer shared responsibility provisions. There's a lot to keep track of with the ACA, but this is certainly one of the most important. By offering affordable coverage, ALEs can avoid these penalties and ensure compliance with the ACA's requirements.

In summary, the IRS's update to the affordability percentage is a significant change that ALEs must consider for their upcoming plan years. By understanding the implications and making necessary adjustments, employers can maintain compliance and provide affordable healthcare coverage to their employees.

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