On Aug 23, 2023, the IRS updated the affordability percentage to 8.39% (a significant decrease from 9.12% in 2023) for plan years that start on or after Jan 1, 2024.
This percentage is used by applicable large employers to determine whether or not the employer’s coverage is considered affordable for that employee, and is substantially lower than prior years.
There are 3 affordability safe harbors an employer can use to determine whether or not coverage is “affordable” for a certain employee. The 3 safe harbor methods include:
- Rate of Pay
- W-2
- Federal Poverty Level
As an example, an employee is offered employer-sponsored coverage that meets minimum value. For the 2024 calendar year, his employer will use the Rate of Pay safe harbor to set premium amounts for full-time employees. The lowest-paid employees make $10 per hour. To use the Rate of Pay safe harbor, the employer would use 130 hours per month times $10 per hour (which is $1,300 per month). To meet the affordability threshold in 2024, the employer would set the employee’s monthly premium cost that doesn’t exceed 8.39% of $1,300 (which is $109.07 per month). In 2023, the percentage threshold was 9.12%, which meant the most an employee making $10/hour could be charged for the lowest-cost plan was $118.56.
Thus, the employer will need to increase the employer contribution to ensure the coverage remains affordable using the Rate of Pay safe harbor.
The effect of such a substantial decrease in affordability percentage is that the employee’s required contribution will be LESS and the employer’s contribution will be MORE.
Note, plans that renew on 11/1/23 or 12/1/23 would need to use the 2023 affordability percentage, which is 9.12%, for the entire plan year. Therefore, an applicable large employer needs to decide which affordability safe harbor they will use and ensure premium contributions are designed properly before the plan’s start date, and NOT wait to figure it out during ACA reporting.
IRS Rev. Proc. 2023-29: https://www.irs.gov/pub/irs-drop/rp-23-29.pdf
This percentage is used by applicable large employers to determine whether or not the employer’s coverage is considered affordable for that employee, and is substantially lower than prior years.
There are 3 affordability safe harbors an employer can use to determine whether or not coverage is “affordable” for a certain employee. The 3 safe harbor methods include:
- Rate of Pay
- W-2
- Federal Poverty Level
As an example, an employee is offered employer-sponsored coverage that meets minimum value. For the 2024 calendar year, his employer will use the Rate of Pay safe harbor to set premium amounts for full-time employees. The lowest-paid employees make $10 per hour. To use the Rate of Pay safe harbor, the employer would use 130 hours per month times $10 per hour (which is $1,300 per month). To meet the affordability threshold in 2024, the employer would set the employee’s monthly premium cost that doesn’t exceed 8.39% of $1,300 (which is $109.07 per month). In 2023, the percentage threshold was 9.12%, which meant the most an employee making $10/hour could be charged for the lowest-cost plan was $118.56.
Thus, the employer will need to increase the employer contribution to ensure the coverage remains affordable using the Rate of Pay safe harbor.
The effect of such a substantial decrease in affordability percentage is that the employee’s required contribution will be LESS and the employer’s contribution will be MORE.
Note, plans that renew on 11/1/23 or 12/1/23 would need to use the 2023 affordability percentage, which is 9.12%, for the entire plan year. Therefore, an applicable large employer needs to decide which affordability safe harbor they will use and ensure premium contributions are designed properly before the plan’s start date, and NOT wait to figure it out during ACA reporting.
IRS Rev. Proc. 2023-29: https://www.irs.gov/pub/irs-drop/rp-23-29.pdf
COMMENTS