Employee Benefits Compliance, Penalties

Affordable Care Act’s Pay or Play Affordability Percentage Decreases in 2024

On Aug. 23, 2023, the IRS issued Revenue Procedure 2023-29 to index (or adjust for inflationary considerations) the contribution percentage in 2024 for determining the affordability of an employer’s plan under the Affordable Care Act (ACA). For plan years beginning in 2024, employer-sponsored coverage will be considered affordable under the ACA’s pay or play rules if the employee’s required contribution for self-only coverage does not exceed 8.39% of their household income for the year. In 2023, the affordability calculation decreased to 9.12% of the safe harbor of Form W-2 wages, hourly pay or Federal Poverty Level (FPL). See the previous Leavitt Group article on 2023 affordability percentages and prior Leavitt Group article on pay or play penalties for unaffordable plan offerings.  Failure to offer an affordable, minimum value, minimum essential coverage to eligible full-time employees could result in a penalty should an employee seek and receive subsidized health coverage through the Marketplace Exchange. For the calendar year 2024, what is commonly called the “A Penalty” (IRC Section 4980H(a)) is $2,970 (a $90 increase from 2023) and the “B” Penalty (IRC Section 4980H(b)) is $4,460 (a $140 increase from 2023).

Pay or Play Rules

The ACA’s pay or play rules require applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees (and dependents) or pay a penalty. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty. An ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed  an amount originally set at 9.5% of an employee’s household income for the taxable year, and adjusted or indexed for inflation each year. This percentage is based on health plan premium growth rates in relation to income growth rates.

Code Section4980H(a) – Not offered4980H(b) – Offered, but unaffordableAffordability Percentage
DescriptionCoverage not offered to 95% of full-time employees (30+hours, including variable hour).Coverage offered, but unaffordable or is not minimum value (covering 60% of cost of coverage).Premium credits and affordability safe harbors.
  • For 2024 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 8.39% of the FPL  (FPL is $14,580 for mainland US — or $101.94 per month; down from $103.28 in 2023); calculated as (8.39% x $14,580 FPL for 2023) ÷ 12, rounded to the nearest penny.
  • The affordability test applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that provides minimum value.

Because an employer generally will not know an employee’s household income, the IRS has provided three optional affordability safe harbors that ALEs may use to determine affordability based on information that is available to them: the Form W-2 safe harbor, the rate of pay safe harbor and the federal poverty level safe harbor. See the prior Leavitt Group article on pay or play penalties for unaffordable plan offerings

Impact of Decrease

For 2024, the affordability percentage significantly decreases to 8.39%. This means that employer-sponsored coverage for the 2024 plan year will be considered affordable under the pay or play rules if the employee’s required contribution for self-only coverage does not exceed 8.39% of the employee’s household income for the tax year.

This is another substantial decrease and the lowest percentage since the inception of the affordability rules (at more than 1% below the statutory affordability percentage of 9.5%). As a result, many employers may have to significantly lower the amount they require employees to contribute for 2024 to meet the adjusted percentage. Employers using the FPL safe harbor to determine affordability cannot charge more than $101.94 per month for individual coverage.

Off-calendar year plans may wait until the first month of their plan year in 2024 to adjust the affordability percentage, although employers are permitted to adjust affordability on January 1, 2024, should they elect. If choosing to do so, it is important to remember that mid-year plan changes require a 60-day advanced notice where impacting cost significantly and that notice may cause election changes mid-year as well.

Employers are encouraged to plan ahead for the adjustment. Work with your Leavitt Group representative to strategize for the 2024 plan year and its’ increases in cost.

Source: Zywave, republished with permission. Some content by Leavitt Group.