2024 Play or Pay Affordability Percentage Decreases Again
The IRS has issued Revenue Procedure 2023-29, announcing that the affordability percentage for the 2024 plan year has decreased to 8.39% from 9.12% in 2023.
Employer Action Items
For the second year in a row, the IRS has decreased the annual affordability percentage, resulting in the 2024 percentage amount that is 1.11% below the statutory affordability percentage of 9.5%. As a result, many employers may have to lower their employee contributions to meet the adjusted percentage.
As a side-note, employers should be aware that wellness incentives and surcharges, as well as certain opt-out and cash-in-lieu arrangements, may also factor into the affordability of an offer of coverage.
For additional information, we have provided an affordability calculator to assist you in establishing minimum contribution thresholds for the 2024 plan year, found here.
The affordability percentage is officially referred to as the Section 36B Required Contribution Percentage under Internal Revenue Code (Code) Section 36B and is used by employers subject to the Affordable Care Act’s (ACA’s) employer mandate, commonly known as “play or pay,” to assess the affordability of the health plans offered to their full-time employees. Employers subject to the employer mandate are referred to as applicable large employers (ALEs). Failure by an ALE to offer at least one “affordable” health plan option could result in a penalty assessment under Code Section 4980H(b) for each full-time employee who obtains coverage in the Marketplace and qualifies for a subsidy in lieu of enrolling for coverage under the ALE’s health plan.
In addition, the IRS updated Code Section 36B’s Applicable Percentage Table for the 2024 calendar year. The table is used to determine an individual’s eligibility for that subsidy.
General Overview of Affordability Safe Harbors
Because an ALE generally will not know an employee’s household income, the IRS has provided three optional safe harbors that may be used to determine affordability based on information that is available to them:
- Form W-2 safe harbor
- Rate of pay safe harbor
- Federal poverty line safe harbor
An employer may use one or more of the affordability safe harbors if it offers its full-time employees (and dependents) the opportunity to enroll in minimum essential coverage under a health plan that provides minimum value with respect to the self-only coverage offered to the employees. Note that the affordability safe harbors are only used to determine whether an employer’s coverage satisfies the affordability test for purposes of the employer mandate. These safe harbors do not affect an employee’s eligibility for a subsidy in the Marketplace, which is based on the affordability of employer-sponsored coverage relative to an employee’s household income.
Form W-2 Safe Harbor
Under the Form W-2 safe harbor, an ALE may determine the affordability of its health coverage by reference only to an employee’s wages from that ALE, instead of by reference to the employee’s household income. For this purpose, “wages” is the amount that is required to be reported in Box 1 of the employee’s Form W-2.
An ALE satisfies the Form W-2 safe harbor with respect to an employee if the employee’s required contribution for the calendar year for the ALE’s lowest cost, self-only coverage that provides minimum value during the entire calendar year does not exceed 9.5% (as adjusted) of that employee’s Form W-2 wages from the employer for the calendar year.
To be eligible for the Form W-2 safe harbor, the employee’s required contribution must remain a consistent amount or percentage of all Form W-2 wages during the calendar year (or during the plan year for plans with non-calendar year plan years). Thus, an ALE may not make discretionary adjustments to the required employee contribution for a pay period. A periodic contribution that is based on a consistent percentage of all Form W-2 wages may be subject to a dollar limit specified by the employer.
ALEs determine whether the Form W-2 safe harbor applies after the end of the calendar year and on an employee-by-employee basis, taking into account W-2 wages and employee contributions.
Rate of Pay Safe Harbor
The rate of pay safe harbor was designed to allow ALEs to prospectively satisfy affordability without the need to analyze every employee’s wages and hours. For hourly employees, the rate of pay safe harbor allows an ALE to:
- Take the lower of the hourly employee’s rate of pay as of the first day of the coverage period (generally, the first day of the plan year) or the employee’s lowest hourly rate of pay during the calendar month;
- Multiply that rate by 130 hours per month (the benchmark for full-time status for a month); and
- Determine affordability for the calendar month based on the resulting monthly wage amount.
Specifically, the employee’s monthly contribution amount (for the self-only premium of the employer’s lowest cost coverage that provides minimum value) is affordable for a calendar month if it is equal to or lower than 9.5% (as adjusted) of the employee’s applicable hourly rate of pay multiplied by 130 hours. The final regulations allow an ALE to use the rate of pay safe harbor even if an hourly employee’s rate of pay is reduced during the year.
For salaried employees, their monthly salary as of the first day of the coverage period would be used, instead of hourly salary multiplied by 130 hours. However, if the monthly salary is reduced during the coverage period, including due to a reduction in work hours, the rate of pay safe harbor may not be used.
Federal Poverty Line Safe Harbor
An ALE may also rely on a design-based safe harbor using the federal poverty line (FPL) for a single individual. Employer-provided coverage is considered affordable under the FPL safe harbor if the employee’s required contribution for the calendar month for the lowest cost self-only coverage that provides minimum value does not exceed 9.5% (as adjusted) of the FPL for a single individual for the applicable calendar year, divided by 12. As the FPL for the year is not made available until January of that year, the final regulations allow ALEs to use the poverty guidelines in effect within six months before the first day of the plan year for purposes of this safe harbor. The 2023 FPL for the 48 contiguous states and the District of Columbia is $14,580 (one-person household). Thus, for a plan with a calendar year plan year, to satisfy the Federal Poverty Line Safe Harbor, the monthly contribution cannot exceed $101.94 ($14,580 x 8.39% ÷12).
The FPL safe harbor allows ALEs to disregard certain employees in determining the affordability of health coverage (that is, employees who cannot receive a Marketplace subsidy because of their income level or eligibility for Medicare, and therefore cannot trigger an ALE’s liability for an employer mandate penalty). The FPL safe harbor also provides ALEs with a predetermined maximum amount of employee contribution that in all cases will result in the coverage being deemed affordable.
For questions regarding this Alert or any other related compliance issues, please contact your client experience team.