New ACA Affordability Percentage For 2024 Is 8.39%

CATEGORY: Client Update for Public Agencies
CLIENT TYPE: Public Employers
DATE: Oct 06, 2023

The IRS has set the new Affordable Care Act (ACA) affordability percentage to an unprecedented low 8.39% for 2024.  This new affordability percentage is 0.83% lower than the current 2023 affordability percentage (from 9.12% to 8.39%).

While the Internal Revenue Code originally set the affordability threshold to 9.5%, the Internal Revenue Service (IRS) retains the authority to release an adjusted percentage each year.  (See 26 U.S.C. Section 36B(c)(2)(C)(i)).  From 2015 to 2022, the IRS set an affordability percentage above 9.5%, going as high as 9.86% in 2019.  Last year, the IRS dropped the affordability percentage below 9.5% for the first time by setting it at 9.12%.  For 2024, the IRS is dropping it even lower.

Applicable large employers are advised to check whether their offers of employer-sponsored health coverage are affordable using the 8.39% threshold.  When the affordability percentage decreases (while health insurance premiums for employee-only coverage increase), the potential impact is that some offers of coverage may not be affordable unless the employer provides a higher employer contribution.

To determine whether an offer of health coverage is affordable, an employer must run an affordability calculation to determine whether an employee’s “Required Contribution” toward the premium for the lowest cost employee-only coverage exceeds or does not exceed 8.39% (2024) of the employee’s household income for the taxable year.  Since employers typically do not know the total household income of each of their employees, the ACA provides three affordability safe harbor options an employer may adopt and apply on a reasonable and consistent basis:

  1. Under the Form W-2 Safe Harbor, coverage is affordable if the employee’s Required Contribution is less than or equal to 8.39% (2024) of the employee’s wages reported in Box 1 of Form W-2.
  2. Under the Rate of Pay Safe Harbor, coverage is affordable if the employee’s Required Contribution is less than or equal to 8.39% of the monthly wage amount for hourly employees (the hourly rate multiplied by 130 hours), or the monthly salary for salaried employees.
  3. Under the Federal Poverty Line Safe Harbor, coverage is affordable if an employee’s Required Contribution does not exceed 8.39% of the Federal Poverty Line for a single individual.

There are additional factors, such as health flex contributions and cash in lieu, that can impact the amount of an employee’s Required Contribution and the affordability calculation.  For more information about how to run the affordability calculation and whether your agency needs to revise its employer contribution to maintain affordable offers of health coverage, please reach out to us.

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