The Affordable Care Act (“ACA”) affordability threshold typically changes every year. As is customary, the IRS has announced the 2025 threshold amount that will increase to 9.02% (from 8.39% in 2024). By way of background, determining whether employer-sponsored health plans meet the 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. This generally means that if an employee’s share of the premium for employer-provided coverage for 2025 is more than 9.02% of his or her “household income,” the coverage is not considered affordable for that employee and the ALE may be liable for a penalty if that employee obtains a premium tax credit through an ACA Exchange/Marketplace. Employers and plan sponsors need to carefully review this change and the increased percentage to ensure plans understand/comply with affordability.
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.
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 2025 with an employee premium share not exceeding $113.20 per month for employee-only coverage.
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.
ALEs must stay updated on their compliance with the always evolving ACA employer mandate rules and regulations. When planning for the 2025 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 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.