Determining whether employer-sponsored health plans meet the Affordable Care Act (ACA) affordability and minimum value standards remains a significant factor for an Applicable Large Employer or “ALE” to consider in determining potential liability for pay or play/employer mandate penalties. While the affordability threshold typically changes every year, it was a surprise for the IRS to announce that the threshold would significantly decrease from 9.61% in 2022 to 9.12% in 2023. This percentage represents the lowest amount since the 9.5% (indexed) affordability threshold was implemented in 2014. See this IRS page at Q&A 40 for a chart listing each year’s prior percentage. Employers and plan sponsors need to carefully review this change and the decreased percentage to ensure plans comply with affordability.
Minimum Value and Affordable Offers
An ALE avoids a potential penalty if at least one of its health plans provides minimum value and is offered at an affordable price to full-time employees (FTEs). Thus, ALEs should be annually considering the new affordability percentage to determine if they are subsidizing enough of the employee’s (self-only) premium. Otherwise, if the coverage is not affordable and the FTE then obtains a subsidy in the exchange, the ALE is subject to a penalty.
2023 Plan Design Considerations
For 2023, some ALEs may have to lower their employee share of medical plan contributions to meet the affordability percentage. The 2023 ACA affordability percentage applies for the 2023 plan year, so a calendar year plan will have the new 9.12% affordability threshold apply for the plan year beginning January 1, 2023. ALEs may use an affordability safe harbor to measure the affordability of their coverage and may rely on the adjusted affordability contribution percentages for each year. The three safe harbors that measure affordability are based on Form W-2 wages from that employer, the employee’s rate of pay, or the federal poverty line (FPL) for a single individual. The affordability test applies only to the portion of the annual premium 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 also satisfies the ACA minimum value requirement. Some employers will simplify affordability compliance by using the FPL safe harbor and offering at least one medical plan option to FTEs for 2023 with an employee premium share not exceeding $103.28 per month for employee-only coverage.
ALE Reporting Requirement
ALEs must report to the IRS on Forms 1094/5-C if they are offering affordable health care options to FTEs and dependents. The determination of whether an ALE may be liable for a penalty is based on information reported on those Forms. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty. Many ALEs have received IRS letters informing them of ACA employer mandate pay or play penalty assessments. See this IRS webpage for more details on the employer mandate and reporting, and the pay or play penalty assessment process.
Employer Next Steps
ALEs must stay updated on their compliance with the always evolving ACA employer mandate rules and regulations. When planning for the 2023 plan year, ALEs should confirm that at least one of their minimum value plans meets one of the affordability safe harbors for each of its FTEs in order to avoid a potential pay or play penalty. Employers should also act quickly in response to any IRS employer mandate penalty notice or letter. The IRS generally expects a response within 30 days, although extensions can typically be requested if needed.
Your Conner Strong & Buckelew account team will continue to work with you to implement and understand the complex requirements of the ACA. The account team will also assist in evaluating the new percentage as it relates to the impact on your plan’s adherence. Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.