Login Join us
Policy & Advocacy

IRS Updates ACA Affordability Percentage Threshold for Plan Year 2025

icon_featured_hand

October 09, 2024

Key Actions

  • To meet the ACA affordability requirement, review and ensure that the employee contribution for the lowest cost self-only health coverage option offered uses 9.02% in calculating the affordability threshold under one of three optional affordability safe harbors for plan years beginning in 2025.
  • Note that the ACA statutory language refers to affordability based on household income. However, the ACA regulations acknowledge that employers would not practically be able to determine household income and instead base the affordability determination on three safe harbors calculations that use the affordability percentage (in this case 9.02%) to annually determine the affordability threshold for the employer’s offer of coverage.

The IRS recently released Rev Proc. 2024-35, which set the ACA benchmark for determining the affordability of employer-sponsored health coverage at 9.02 percent of an employee’s household income (see safe harbor note, below) for the 2025 plan year. This latest affordability percentage represents an increase from the 8.39 percent of 2024, the lowest percentage in the history of the threshold.

Under the ACA, employer-sponsored coverage is considered “affordable” if an employee’s required contribution for the lowest-cost, self-only option with minimum value does not exceed an annually indexed percentage of the employee’s household income. Employees that have been offered coverage meeting certain requirements including affordability may be barred from receiving premium tax credits or cost-sharing reductions for individual ACA marketplace exchange coverage.

Safe harbor note. It was acknowledged in ACA rulemaking that employers generally would not be able to determine household income so the IRS created three safe harbors for group health plans to establish and report on benefits affordability: the federal poverty line safe harbor, the rate of pay safe harbor and the W-2 safe harbor (which is based on Box 1 of the W-2). The rate-of-pay and the W-2 safe harbors are calculated on an employee-by-employee basis, while the federal poverty line safe harbor broader calculated amount that may be applied to some or all full-time employees.

For plan years beginning in 2025, if the employer uses 9.02% to calculate the affordability threshold under one of the three safe harbors and offers the employee self-only coverage (that meets certain minimum value standards) at an employee cost lower than the threshold, then generally the employer will be considered to have made an “affordable” offer of coverage. This will help the employer avoid an ACA penalty under Internal Revenue Code (IRC) Section 4980H(b) and would be considered “affordable” regardless of whether the employee ultimately elects/declines employer coverage, whether the coverage elected is a higher cost plan option, or whether it covers more than just the employee under self-only coverage.

More Topics

Resource icon_right_chevron_dark Affordable Care Act (ACA) icon_right_chevron_dark Health Benefits Taxation icon_right_chevron_dark
More in Policy & Advocacy