On Aug. 23, 2023, the IRS issued Revenue Procedure 2023-29 which indexes the contribution percentage to be used for determination of the affordability of an employer’s medical coverage under the Affordable Care Act (ACA) in 2024. This contribution percentage determines which applicable large employers may face penalties under §4980H(b) for failure to offer affordable coverage that meets minimum value, as well as which individuals may qualify for subsidized coverage through a public healthcare Marketplace.
With Revenue Procedure 2023-29, the IRS has for the second consecutive year significantly decreased the affordability percentage, this time from 9.12% in 2023 to 8.39% in 2024. This marks the first time the affordability percentage has dipped below 9% since implementation of the ACA’s employer shared responsibility (“pay or play”) provision.
Under §4980H, applicable large employers with 50 or more full-time and full-time equivalent employees (FTEs) must offer coverage to full-time employees that is affordable to avoid potential §4980H(b) penalties. In addition, individuals (including employees and their family members) enrolling for coverage through a public Marketplace will not qualify for subsidized coverage (i.e., federal premium tax credits) if they are eligible for employer-sponsored group health plan coverage that is affordable.
Coverage is considered “affordable” if the required employee contribution does not exceed a set percentage (8.39% in 2024) of the full-time employee’s household income.
· For employees, coverage will be affordable in 2024 if the required employee contribution for the lowest cost minimum value plan option at the employee-only (single) coverage level is equal to or less than 8.39% of the employee’s household income including the individual’s full family household income, where applicable.
· For spouses and dependents, coverage will be affordable in 2024 if the required employee contribution for the lowest cost minimum value plan option for coverage at the family (or any non-employee only) level is equal to or less than 8.39% of the family’s total household income. However, unaffordable family coverage will not trigger a §4980H(b) penalty for the employer.
Coverage is also considered “affordable” under §4980H(b) requirements if the employee contribution satisfies at least one of three IRS-sanctioned safe harbors: 1) federal poverty level (FPL), 2) rate of pay, or 3) Form W-2. Generally, under all allowable determination methods, the affordability percentage has an inverse relationship to an employer’s required contribution amount; the lower the contribution percentage, the greater the employer’s required portion of their medical plan premium will be to sustain affordable employee premium requirements.
Required Contribution Percentage
Originally, for 2014, the required contribution percentage for determining affordability was set at 9.5%. Beginning with 2015, that percentage has been indexed annually. The applicable percentages for each calendar year are reflected in the table below:
Effective for plan years beginning on or after January 1, 2024, the percentage to be used in affordability calculations is 8.39%. The applicable affordability percentage always applies on a full plan-year basis according to the threshold in
place on the first day of each plan year (as opposed to a calendar year basis). As a result, no employer is required to adjust their employees’ premium requirements in the middle of their plan year to satisfy affordability. This means that for calendar year plans, 8.39% applies from January 1, 2024 through December 31, 2024, but for a non-calendar year plan that renews on September 1, the 8.39% threshold applies from September 1, 2024 through the end of the plan year on August 31, 2025.
The decrease in the affordability percentage (from 9.12% in 2023 to 8.39% in 2024) may require applicable large employers (ALEs) to lower employee contributions for employee-only (single) coverage for the 2024 plan year to meet the affordability requirements under §4980H(b). Note that employers are not required to offer affordable coverage to spouses and dependents; however, this lower affordability percentage might allow more spouses and dependents to qualify for subsidized individual health coverage through a public healthcare Marketplace when the cost for the family to participate in the employer’s plan is deemed unaffordable.