Key Points

• The IRS lowered the threshold for "affordable" employer coverage under the Affordable Care Act for 2024 to 8.39% of an employee's household income, down from 9.12% in 2023.
• Employers should evaluate the effect of the revised affordability threshold percentage on health plan contributions and may need to consider lowering employees' contributions for the 2024 plan year.
• Non-compliance with the affordability threshold could lead to IRS-assessed penalties.

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Affordability Threshold Under the ACA and Related Penalties

Under the Affordable Care Act ("ACA"), Applicable Large Employers ("ALEs"), generally those with 50 or more full-time employees (including full-time equivalent employees), may be subject to penalties for failing to offer at least 95% of their full-time employees minimum essential coverage (commonly referred to as "Penalty A"). ALEs may be subject to a different penalty ("Penalty B"), if the offer of coverage made to full-time employees does not provide "minimum value" or is not "affordable" within the meaning of the ACA.

For purposes of Penalty B, the affordability of an employer's coverage is based on the lowest cost, self-only coverage option under the employer's health plan. Coverage is considered to be affordable if the employee's "required contribution" (i.e., share of the premium cost), for the lowest-cost, self-only option does not exceed a specified percentage of the employee's household income. The IRS adjusts the affordability threshold percentage each year and recently announced the percentage will be 8.39% for 2024, a decrease from 9.12% for 2023.

Safe Harbors

Understanding that employers are generally unaware of an employee's household income, the IRS provides ALEs with three safe harbors in determining whether coverage offered to full-time employees is "affordable." Under these safe harbors, the determination of whether an employer's offer of coverage is affordable is based on whether the employee's contribution is below the applicable percentage (8.39%), multiplied by the safe harbor amount.

• W-2 Wages: Offer of coverage is deemed affordable if the employee's required contribution does not exceed 8.39% of Box 1 wages reported on Form W-2.
• Rate of Pay: (i) Offer of coverage to an hourly employee is considered affordable if the employee's required contribution does not exceed 8.39% of that employee's hourly rate multiplied by 130, regardless of actual hours worked; (ii) offer of coverage to a salaried employee is considered affordable if the employee's required contribution does not exceed 8.39% of that employee's monthly salary.
• Federal Poverty Level: Offer of coverage is considered affordable if the employee's required contribution does not exceed 8.39% of the declared Federal Poverty Line, currently $14,580 for the mainland U.S.

Conclusion

Given the significantly lower affordability percentage of 8.39% for 2024, employers should evaluate their health insurance premiums and may want to consider paying more towards the cost of the lowest cost, self-only coverage option to ensure compliance with the updated affordability threshold.

If you have any questions regarding compliance with the ACA, please contact a member of the Hanson Bridgett Employee Benefits Group.