The Internal Revenue Service (IRS) recently announced that the affordability percentage used to determine whether coverage offered by employers is affordable for 2024 will be 8.39%. As with previous decreases to the affordability percentage, applicable large employers (ALEs), generally employers with 50 or more full-time and full-time equivalent employees, need to be aware of certain pitfalls.
Background on the ACA affordability percentage
Under the Patient Protection and Affordable Care Act (ACA) Employer Mandate, ALEs must offer affordable health coverage that meets minimum value requirements to full-time employees or face potential penalties. The affordability percentage, which is adjusted annually, is used to determine the threshold at or below which the cost of coverage will be considered affordable.
Generally, coverage offered to a full-time employee is considered affordable if the employee's contribution for self-only coverage doesn't exceed 9.12% for 2023 (8.39% for 2024) of the employee's household income for the taxable year. Because employers have no actual knowledge of their employees' household incomes, the rules provide for three affordability safe harbors:
- Employee's Form W-2 wages
- Employee's rate of pay
- The federal poverty guidelines for a single individual.
The decreased affordability percentage is adjusted to 8.39% for the safe harbors as well. An employer may use one or more of these safe harbors for all employees or any reasonable category of employees, as long as it's done uniformly and consistently.
Impact on applicable large employers
A decrease in the percentage means that the amount an employee can be required to pay for self-only coverage and still be considered affordable will decrease in 2024. Therefore, unless the cost of health insurance also goes down (e.g., the medical plan cost is reduced through a change in plan design), employers may need to shoulder more of the cost of self-only coverage offered to full-time employees to avoid an Employer Mandate penalty.
Example 1: For the 2024 plan year, an employer decides to leave employee contributions for its employer-sponsored healthcare coverage offered to full-time employees the same as it was in 2023: $200 per month for self-only coverage. Based upon the affordability percentage of 9.12% for 2023, this level of employee contribution for self-only coverage is considered affordable for employees making $26,315.79 or more per year ($2,400/9.12%).
However, in accordance with the newly announced affordability percentage for 2024 (8.39%), an employee would need to make at least $28,605.48 per year ($2,400/8.39%) for the $200 monthly employee contribution for self-only coverage to be considered affordable.
| Self-only Contribution | Affordability Threshold Monthly Wage | Affordability Threshold Annual Wage | Annual Change | ||
| 2023 | 2024 | 2023 | 2024 | ||
| $200 per month | $2,192.88 | $2,383.79 | $26,315.79 | $26,315.79 | 2,289.69 |
The decreased affordability percentage means that a $200-a-month-contribution may be considered unaffordable for more employees in 2024 than in 2023. This change is important for employers with employees within this wage band — between $26,315.79 and $28,605.48 — because they may incur an Employer Mandate penalty in 2024 for unaffordable coverage. The Employer Mandate penalty is $4,320 for 2023 and is estimated to be $4,460 in 2024. To avoid incurring an inadvertent penalty, the employer may need to increase the employer contribution for 2024.
Example 2: For the 2024 plan year, the employer will determine whether employee contributions are affordable using the federal poverty line safe harbor. An ALE satisfies the federal poverty line safe harbor if the employee's required contribution for the lowest-cost self-only coverage that provides minimum value doesn't exceed 8.39% (for 2024) of the federal poverty line for a single individual for the applicable calendar year, divided by 12.
For a calendar year plan that uses the 2023 federal poverty line, the safe harbor for 2024 will be $14,580 x 8.39% = $1,223.26 ($101.94 per month). Employees can't be required to pay an employee contribution of more than $101.94 for coverage to be considered affordable. For 2023, using the 2022 federal poverty line and 2023 affordability percentage (9.12%), the monthly safe harbor amount was $13,590 x 9.12% = $1,239.41 ($103.28 per month).
Next steps for compliance
ALEs should consider reviewing contribution structures for the 2024 plan year, and some may need to increase employer contributions to avoid penalties. Employers should pay close attention to the affordability of coverage as they set employee contributions for their 2024 plan years — particularly employers with calendar year plan years. Employers with full-time employees who were close to the affordability threshold in 2023 should determine how many of those employees' contributions will be deemed unaffordable in 2024 because of the decrease in affordability percentage.
Based on that analysis, employers may wish to adjust their employee contribution requirement for self-only coverage if they wish to limit their exposure to Employer Mandate penalties based on unaffordability.
