Each year, the Internal Revenue Service (IRS) adjusts the percentage that is used to determine affordability under the Affordable Care Act (ACA). The IRS has just announced that for plan years starting on or after January 1, 2024, the affordability rate will be set at 8.39%. This represents a significant reduction from the current rate of 9.12%.
Employers subject to the ACA employer mandate need to check their contribution rates each plan year to ensure their offers of medical coverage to their full-time employees are considered affordable. If offers of coverage are not affordable, the IRS assesses a penalty to the employer for each full-time employee who instead elects Marketplace coverage with tax credits.
This affordability rate represents the maximum percentage of household income that an employer can charge full-time employees for self-only coverage in the lowest-cost medical plan for the offer to be deemed affordable. Since employers do not know their employees’ household incomes, the IRS allows them to use one of three affordability safe harbors. The affordability safe harbor that the employer adopts is used for its annual Form 1095-C reporting.
For plan years starting in 2024:
Federal Poverty Level (FPL)
If the self-only employee contribution is at or below 8.39% of the federal poverty level, the offer is affordable. (For 2024 plan years, this equates to $101.93 or less per month, which is a reduction from the 2023 plan year limit of $103.28.)
Rate of Pay
If the self-only employee contribution is at or below 8.39% of the employee’s monthly pay rate, the offer is affordable. For full-time hourly employees, the employee’s hourly pay rate is multiplied by 130 hours, regardless of actual hours worked. Tips, commissions, and other variable pay cannot be included when using this safe harbor.
W-2 Box 1 Wages
If the self-only employee contribution is at or below 8.39% of the employee’s Box 1 wages, the offer is affordable. This can only be determined at the close of the calendar year.