By Dorian Z. Smith and Cheryl Hughes
September 9, 2024 - Mercer
The Affordable Care Act (ACA) benchmark for determining the affordability of employer-sponsored health coverage will increase significantly - to 9.02% of an employee's household income for the 2025 plan year - up from the 2024 plan-year level of 8.39%, according to IRS Rev. Proc. 2024-35. This affordability percentage can affect individuals’ eligibility for federally subsidized coverage from a public exchange, as well as employers’ potential liability for shared-responsibility (or “play or pay”) assessments.
Under the ACA, employer-sponsored minimum essential coverage (MEC) is affordable if an employee’s required contribution for the lowest-cost, self-only option with minimum value does not exceed an annually indexed percentage of the employee’s household income. Employees and their family members who are eligible for minimum-value employer-sponsored MEC that meets the affordability standard cannot receive premium tax credits or cost-sharing reductions for public exchange coverage.
To determine liability for play-or-pay assessments, three employer safe harbors allow replacing household income in the affordability calculation with one of these figures:
The affordability percentage used in the employer safe harbors is indexed in the same manner as the household income percentage, according to 2015 IRS guidance (Notice 2015-87, Q&A-12).
As explained in Rev. Proc. 2014-37, the original 9.5% affordability percentage is annually adjusted after 2014. For calendar years 2022 and beyond, the Notice of benefit and payment parameters for 2022 includes the method of calculating the premium adjustment percentage.
Indexing of the 2025 affordability percentage is based on premium growth rates relative to income growth rates from 2013 to 2024, using the most recent National Health Expenditure Accounts (NHEA) income and premium data projections. Given those projections, the 2025 affordability percentage will be significantly greater than the 2024 level.
Employers should review the required employee contribution for 2025 coverage if they plan to meet the ACA’s affordability limit under the applicable safe harbor. For the many plans using the FPL affordability safe harbor, the considerations differ for calendar- and noncalendar-year plans.
For 2025 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 9.02% of the FPL for a particular area - $15,060 for mainland US - or $113.20 per month (up from $101.94 in 2024), calculated as (9.02% x $15,060 FPL for 2024) ÷ 12, rounded to the nearest penny. Note that the FPL affordability safe harbor contribution limits are greater for employees who work in Alaska ($141.39, calculated as 9.02% x $18,810 FPL for 2024) and Hawaii ($130.11, calculated as 9.02% x $17,310 FPL for 2024).
Noncalendar-year plans may use the FPL in effect within six months before the first day of the plan year. That means noncalendar-year plans starting in February through July 2025 (if the 2025 FPL is issued in January) or noncalendar-year plans starting in March through August 2025 (if the 2025 FPL is issued in February) may use either the 2024 FPL of $15,060 - resulting in an FPL affordability safe harbor of $113.20 per month - or the 2025 FPL. These noncalendar-year plans would likely benefit from waiting to use the 2025 FPL since it will likely exceed the 2024 FPL and yield a higher FPL safe harbor contribution limit [(9.02% x 2025 FPL) ÷ 12]. On the other hand, depending on when the 2025 plan year starts and the 2025 FPL is issued, waiting for the 2025 FPL may not be practicable.
The adjusted percentage applies on a plan-year - not calendar-year - basis. This means noncalendar-year plans starting in 2024 will continue to use 8.39% to determine affordability in 2025 until their new plan year starts. As described above, noncalendar-year plans won't be able to calculate the likely higher FPL safe harbor contribution limit for plan years beginning after Jan. 1, 2025, until the Department of Health and Human Services (HHS) issues the 2025 FPL guidelines. As a reminder, for 2024 noncalendar-year plans using the mainland US FPL affordability safe harbor, the required employee contribution cannot exceed $105.29 per month, calculated as (8.39% for 2024 x $15,060 FPL in 2024) ÷ 12, rounded to the nearest penny.