IRS Updates ACA Affordability Threshold

The IRS issued Revenue Procedure 2022-34 which announces the 2023 indexing adjustment percentage for determining the affordability threshold for employer-sponsored health insurance coverage under the ACA.

The percentage is adjusted annually for inflation, and the 2023 threshold decreased substantially from 9.61% to 9.12%. The new percentage applies for plan years beginning in 2023.

Impact on Employers

Recall that under the ACA provisions, employer-sponsored coverage will only be considered affordable if an employee’s required contribution of the lowest-cost self-only coverage does not exceed 9.12% of the employee’s household income for the tax year. The reduction in percentage will require higher employer contributions in order to keep plans affordable at the lower 9.12% rate. Neglecting to offer affordable, minimum value coverage to full-time employees could result in penalties under the Pay or Play provisions of the ACA.

How Does the Math Work?

There are two different safe harbor calculation methods that employers can use:

Federal Poverty Line Affordability Safe Harbor: Under the FPL method, the employee contribution for the lowest cost plan (for full-time employees) cannot exceed $103.28 per month. This reflects 9.12% of the Federal Poverty Level which is $13,590 in 2023 for one person. Using the FPL Affordability Safe Harbor automatically deems coverage affordable for all full-time employees and permits the employer to use the qualifying offer method for streamlined ACA reporting.

Rate of Pay Affordability Safe Harbor: Under the Rate of Pay method, employers must do the math to confirm that the employee contribution for lowest cost plan (for full-time employees) cannot exceed 9.12% of the lowest hourly rate of pay (x 30 hours per week) and the lowest monthly salary. States with higher minimum wage requirements will benefit from using the Rate of Pay method. For example, the California minimum wage of $15.00 creates a maximum contribution of $177.84 per month ($15/hour x 30 hours per week x 52 weeks x 9.12% ¸ 12).

Contribution Strategy

While the FPL method yields a lower required employee contribution, the calculation process is much simpler. The Rate of Pay method will often allow for a higher employee contribution (for the lowest cost plan). However, the calculations must be customized to actual employee rates of pay within each organization and within each region if different plans are made available to different populations. 

2023 Contribution Strategy Considerations: Consider the ACA affordability safe harbor requirements when designing 2023 employee contribution levels to avoid potential employer mandate “B Penalty” liability. Where possible within budgetary constraints, employers should prepare to offer at least one medical plan option to full-time employees in all regions with an employee share of the premium not exceeding $103.28/month for employee-only coverage to simplify affordability compliance under the federal poverty line safe harbor.