This article has been updated.
The IRS announced that the 2023 health plan affordability threshold—used to determine if an employer's lowest-premium health plan meets the Affordable Care Act's (ACA's) affordability requirement—will be 9.12 percent of an employee's "household income," down from the 2022 limit of 9.61 percent.
The new affordability threshold rate was included among health plan tax provisions in IRS Revenue Procedure 2022-34, issued on July 25. The affordability threshold, which affects employers' potential liability for ACA shared-responsibility penalties, is adjusted annually based on health plan premium growth relative to income growth, using national health expenditure data from the Centers for Medicare & Medicaid Services.
The adjusted percentage applies on a plan-year—not calendar-year—basis, and noncalendar-year plans will continue to use 9.61 percent to determine affordability in 2023 until their new plan year starts.
Under the frequently used federal poverty line (FPL) safe harbor for determining "household income" in relation to affordability:
- The top premium for an employer's lower-cost, self-only 2023 plan will be $103.28 per month, based on a look-back 2022 FPL of $13,590 in annual income. (Regulations allow employers to use the published FPL rate in effect six months prior to the beginning of the plan year.)
- That's virtually the same as the 2022 plan year top premium of $103.15 per month, based on a look-back 2021 FPL of $12,880.
For group health plan options offered to employees during the upcoming fall open enrollment period, "employers should review the required employee contribution for 2023 coverage if they plan to meet the ACA's affordability limit under the applicable safe harbor," Dorian Z. Smith, a partner at HR consultancy Mercer in New York City, and Cheryl Hughes, a principal in the firm's Washington, D.C., office, explained in an alert.
Brian Gilmore, lead benefits counsel at Newfront, an insurance and financial services firm in San Francisco, wrote in an alert that "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 that deems coverage affordable for all full-time employees."
He added, "Where possible within budgetary constraints, employers should prepare to offer at least one medical plan option to full-time employees in all regions with an employee-share of the premium not exceeding $103.28/month for employee-only coverage to simplify affordability compliance under the federal poverty line safe harbor."
Household Income Safe Harbors
"The IRS recognized that an employer would have no way to determine an individual's household income, so as a result the IRS created three affordability safe harbors that an employer can use to satisfy the employer's affordability threshold," according to an alert by Accord Systems LLC, an ACA compliance software firm. "An employer wishing to use one of the affordability safe harbors will use the 2023 affordability threshold of 9.12 percent when determining if the safe harbor has been satisfied."
The three safe harbors for household income are:
- An employee's W-2 wages, as reported in Box 1, generally as of the first day of the plan year. The Form W-2 affordability safe harbor "provides little predictability because employees' Box 1 wages are unknown until January of the following year," Gilmore pointed out.
- An employee's rate of pay, which applies the affordability threshold percentage based on two separate tests—one for hourly full-time employees and another for salaried full-time employees.
- The federal poverty line, as published annually by the Department of Health and Human Services. The 2022 FPL is $13,590 for individuals (although slightly different for employees in Hawaii and Alaska). For 2023 calendar-year plans, the $13,590 FPL is divided by 12 and multiplied by 9.12 percent, which equals an allowable monthly premium of $103.28, rounded to the nearest penny.
"Choosing an IRS safe harbor for proving ACA affordability can be difficult, but employers should know that they do not need to apply one safe harbor across their entire workforce and should choose what makes the most sense for their organization," advised Joanna Kim-Brunetti, chief legal officer for benefits compliance software firm Trusaic.
Choosing a Safe Harbor
Applicable large employers (ALEs)—those with 50 or more full-time or equivalent employees—are subject to the ACA's shared-responsibility coverage mandate. These employers should always use the FPL safe harbor where available because it results in coverage automatically being deemed affordable with no per-employee calculations necessary, Gilmore advised.
Employers that do not offer a medical plan option meeting the FPL safe harbor, he noted, should instead use the rate-of-pay safe harbor, which "requires a straightforward analysis" of the lowest hourly rate of pay for hourly full-time employees and the lowest monthly salary for salaried full-time employees.
Although more complicated to calculate, the rate-of-pay safe harbor generally allows for higher employee premiums, Gilmore noted, as in the following examples he gave for 2023 calendar-year plans:
- If the lowest-paid hourly employee makes $15 an hour, the employee contribution rate for the lowest-cost, employee-only plan cannot exceed $177.84 per month.
- If the lowest-paid full-time salaried employee makes $36,000, the employee contribution rate for the lowest-cost, employee-only plan cannot exceed $273.60 per month.
ALEs that do not offer a plan that is affordable and provides minimum essential coverage to at least 95 percent of their full-time workers and dependents may be subject to employer penalties under Internal Revenue Code Section 4980H(a). This year, Section 4980H(a) penalties are $229.17 a month or $2,750 annualized, per employee.
Plans that aren't "affordable" and don't provide minimum value (MV) may be subject to Section 4980H(b) penalties, which this year are $343.33 a month or $4,120 annualized, per employee.
"An employer can only receive the (a) penalty or the (b) penalty, never both," observed Robert Sheen, founder and president of Trusaic. The penalties are "assessed on a monthly basis for every full-time employee that did not receive an offer of coverage or received such an offer, but the offer was either unaffordable or did not provide MV or both and the employee received a PTC for that month," he noted.
In January, the IRS will make inflation adjustments to these penalties for 2023 plans.
Wellness Programs with Premium Incentives
Some employees have the option of participating in workplace wellness programs that lower their health plan premiums, sometimes conditioned on meeting specified health goals.
"In determining whether the self-only contribution amount satisfies affordability, with the exception of wellness programs designed to prevent or reduce tobacco use, affordability will be determined assuming that each employee fails to satisfy the requirements of the wellness program," noted HR consultancy Buck in a post by Richard Stover, a principal at the firm, and Randie Thompson, the firm's compliance director.
"For wellness programs that are designed to reduce or prevent tobacco use, affordability can be determined assuming that each employee satisfies the requirements of the wellness program," the consultants explained. "If the plan has an opt-out credit for waiving coverage, generally that credit needs to be added to the self-only contribution amount in determining affordability."
Related SHRM Articles:
Medical Plan Costs Expected to See Bigger Rise in 2023, SHRM Online, August 2022
Inflation Reduction Act's Health Care Provisions Could Affect Employers, SHRM Online, August 2022