How the 2023 ACA Affordability Decrease to 9.12% Affects Employers

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How the 2023 ACA Affordability Decrease to 9.12% Affects Employers

By Brian Gilmore | Published August 2, 2022

Executive Summary

2023 ACA Affordability Percentage (Large!) Decrease to 9.12%: The IRS has announced that the ACA affordability percentage used to determine compliance with the employer mandate will decrease dramatically from 9.61% in 2022 to 9.12% in 2023 (by far the lowest level to date) of the employee’s household income, as determined under one of the safe harbor approaches.
2023 Lowest-Cost Plan is No More Than $103.28/Month (Federal Poverty Line Affordability Safe Harbor): Employers with a calendar plan year offering a medical plan option in 2023 that costs employees no more than $103.28 per month for employee-only coverage will automatically meet the ACA affordability standard under the federal poverty line affordability safe harbor.
2023 Lowest-Cost Plan Exceeds $103.28/Month (Rate of Pay Affordability Safe Harbor): Employers that do not offer a medical plan option meeting the 2023 federal poverty line affordability safe harbor should generally utilize the rate of pay affordability safe harbor.
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.

2023 Affordability Percentage Set at 9.12%

This week the IRS issued Revenue Procedure 2022-34 which significantly decreases the affordability threshold for ACA employer mandate purposes to 9.12% for plan years beginning in 2023.

The historical breakdown is as follows:

2015 Percentage: 9.56%
2016 Percentage: 9.66%
2017 Percentage: 9.69%
2018 Percentage: 9.56%
2019 Percentage: 9.86%
2020 Percentage: 9.78%
2021 Percentage: 9.83%
2022 Percentage: 9.61%
2023 Percentage: 9.12%

Which Employers Need to Worry About ACA Affordability?

The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.” An employer is an ALE if it employed an average of at least 50 full-time employees on business days during the preceding calendar year.

ALEs are receiving IRS Letters 226J informing them of ACA employer mandate penalty assessments.

Why Does it Matter if an ALE Offers “Affordable” Coverage?

There are two potential ACA employer mandate penalties.

a) IRC §4980H(a)—The “A Penalty”
The penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.

b) IRC §4980H(b)—The “B Penalty”
The B Penalty applies for each full-time employee who was:

not offered minimum essential coverage,
offered unaffordable coverage, or
offered coverage that did not provide minimum value.

How Does the ACA Affordability Test Work?

The ACA affordability test is based on the employee-share of the premium for employee-only coverage under the ALE’s lowest-cost plan option. Employers that offer different medical plan options to different groups of employees will need to look to the lowest-cost plan option available to each particular employee group to determine affordability.

The IRS provides three safe harbors for ALEs to determine whether an offer of coverage is affordable for purposes of avoiding B Penalty liability:

Federal Poverty Line Affordability Safe Harbor
Rate of Pay Affordability Safe Harbor
Form W-2 Affordability Safe Harbor

How Do Flex Credits Affect the Affordability Determination?

Flex credits will reduce the dollar amount of the employee-share of the lowest-cost plan option providing minimum value if they meet a three-part test to qualify as a “health flex contribution.”

Summary

As with just about everything related to the ACA, the affordability determination under the employer mandate rules can be complex.

Employers should always use the federal poverty line affordability safe harbor where available, because it results in coverage automatically being deemed affordable and permits employers to take advantage of streamlined ACA reporting via the Qualifying Offer Method.

The Author

Brian Gilmore

Lead Benefits Counsel, VP, Newfront

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans.