The ACA Affordability Determination in 2025

By Brian Gilmore
September 12, 2024 - Newfront

Question: What steps do employers need to take to ensure their coverage meets the ACA affordability standard in 2025?

Short Answer: The 2025 ACA affordability threshold increases to 9.02%. The easiest way to ensure affordability in 2025 is to meet the federal poverty line affordability safe harbor by offering at least one medical plan option (that provides minimum value) for which the monthly employee-share of the premium for employee-only coverage does not exceed $113.20. Otherwise, employers will need to calculate the applicable affordability threshold under one of the other safe harbor approaches, which are based on employee compensation levels.

Executive Summary

2025 Affordability Percentage Set at 9.02%
The IRS has issued Revenue Procedure 2024-35, which increases the affordability threshold for ACA employer mandate purposes to 9.02% for plan years beginning in 2025.

The affordability percentage increase is based on the ACA’s index inflation metric, which is the rate of premium growth for the preceding year over the rate of CPI growth for the preceding year. The affordability percentages apply for plan years beginning in the listed year. A calendar plan year will therefore have the 9.02% affordability threshold for the plan year beginning January 1, 2025.

Which Employers Need to Worry About ACA Affordability?
The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.” In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

Why Does it Matter if an ALE Offers “Affordable” Coverage?
 There are two potential ACA employer mandate penalties:

  1. IRC §4980H(a) - The “A Penalty”

     The first ACA employer mandate liability is the §4980H(a) penalty’requently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees (and their children to age 26) in any given calendar month.

    The 2025 A Penalty decreases to $241.67/month ($2,900 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange.

    A Penalty liability is focused on whether the employer offered a major medical plan to a sufficient percentage of full-time employees］ot whether that offer was affordable or provided minimum value.

  2. IRC §4980H(b)ゝhe “B Penalty”

    The second ACA employer mandate liability is the §4980H(b) penalty’requently referred to as the “B Penalty” or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty.

    The B Penalty applies for each full-time employee who is:
    - not offered minimum essential coverage,
    - offered unaffordable coverage, or
    - offered coverage that did not provide minimum value.

    Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is not multiplied by all full-time employees.

    An ALE offering minimum essential coverage to a full-time employee will therefore be subject to the B Penalty only if:
    - the coverage does not provide minimum value or is not affordable; and
    - the full-time employee declines the offer of coverage and instead enrolls in subsidized - coverage on the Exchange.

    The 2025 B Penalty decreases to $362.50/month ($4,350 annualized) per full-time employee receiving subsidized coverage on the Exchange.

    Bottom Line: An ALE’s failure to offer coverage that meets the ACA affordability standard for any given full-time employee creates potential B Penalty liability in 2025 of $362.50/month ($4,350 annualized) for that full-time employee.

How Does the ACA Affordability Test Work?
The ACA affordability test is based on the employee-share of the premium for employee-only coverage under the ALE’s lowest-cost plan option that provides minimum value in which the employee is eligible to enroll. In other words, you look to the lowest possible amount that an employee could pay to enroll in the employer’s major medical plan, regardless of what plan option (if any) the employee elects.

Employers that offer different medical plan options to different groups of employees will need to look at the lowest-cost plan option available to each particular employee group to determine affordability. This issue most commonly arises for employers with different regional coverage for employees in various states. For example, the lowest-cost plan option may be a regional HMO in California that is not available to employees in other states. In that situation, the affordability analysis for employees in the other states is based on the lowest-cost plan option available to those out-of-state employees.

The affordability test technically looks to whether that lowest possible employee contribution is within 9.02% (2025) of the employee’s household income. However, the IRS recognizes that employers generally do not know the employee’s household income.

Therefore, the IRS provides three safe harbors for ALEs to determine whether an offer of coverage is affordable for purposes of avoiding B Penalty liability:

  1. Federal Poverty Line Affordability Safe Harbor
  2. Rate of Pay Affordability Safe Harbor
  3. Form W-2 Affordability Safe Harbor

If an ALE’s offer meets any of these safe harbors, the offer of coverage is deemed affordable regardless of whether the employee may qualify for Exchange subsidies based on the employee’s actual situation.

The affordability status of an offer is not affected by an employee electing to enroll in coverage other than the lowest possible employee contribution amount. For example, if an employee chooses the highest-cost family plan coverage option, the offer’s affordability status is still determined by referrdabience to the lowest-cost employee-only coverage option that was available to the full-time employee.

May an ALE Use More than One Affordability Safe Harbor?
Yes, the ALE may choose different safe harbors for any reasonable category of employees. However, the caveat is that the ALE must apply each safe harbor on a uniform and consistent basis for all employees in each category.

The IRS states that reasonable categories include specified job categories, nature of compensation (such as salaried or hourly), geographic location, and similar bona fide business criteria. Listing employees specifically by name (or other categories having the same effect) is not considered a reasonable category.

The 2025 Federal Poverty Line Affordability Safe Harbor
Action Item: Always use this safe harbor if it is available! Consider offering a plan option in 2025 that costs full-time employees no more than $113.20/month to simplify affordability compliance through this safe harbor.

An ALE’s coverage is automatically deemed affordable for all full-time employees if the offer meets the federal poverty line affordability safe harbor.

In order to qualify, the employee-share of the premium for the ALE’s lowest-cost plan option (which provides minimum value) at the employee-only coverage tier cannot exceed 9.02% of the federal poverty line for a single individual, divided by 12. Employers are permitted to use the federal poverty line threshold that is in effect within six months before the first day of the plan year. The 2024 federal poverty line for a single individual in the contiguous 48 states (including D.C.) is $15,060.

Notes:

Accordingly, the 2025 federal poverty line affordability safe harbor applies where the lowest possible employee contribution does not exceed $113.20. ($15,060 x 0.0902 = $1,358.41 / 12 = $113.20)

The historical breakdown is as follows:

ACA Reporting Under the Federal Poverty Line Safe Harbor

ALEs meeting the federal poverty line affordability safe harbor may utilize the Qualifying Offer Method, provided the offer of coverage was made available to the employee’s spouse and dependents, if any.

Under the Qualifying Offer Method, the employer does not complete Line 15 (the employee required contribution) of the full-time employee’s Form 1095-C. This streamlined reporting option is available because the monthly employee-share of the premium for the lowest-cost plan at the employee-only tier is not relevant where coverage is deemed affordable for all employees under the federal poverty line affordability safe harbor.

The employer must check the “Qualifying Offer Method” box in Line 22 (Box A) of the Form 1094-C to take advantage of this approach. For full-time employees who are offered coverage, the employer will list Code “1A” (qualifying offer) in Line 14 of the full-time employee’s Form 1095-C.

The Forms 1094-C and 1095-C Instructions state the employer “may, but is not required to, enter an applicable code on line 16 for any month for which code 1A is entered on line 14,” recognizing that the qualifying offer code in Line 14 already embeds sufficient information to make the Line 16 codes redundant. When entered, employers will use Code “2G” (federal poverty line affordability safe harbor) in Line 16 for waived employees.

For more details:

The 2025 Rate of Pay Affordability Safe Harbor

Action Item: In most cases, ALEs that do not qualify to use the federal poverty line affordability safe harbor (i.e., lowest-cost medical plan option exceeds $113.20) should use the rate of pay affordability safe harbor.

The rate of pay affordability safe harbor applies the applicable affordability percentage based on two separate tests｛ne for hourly full-time employees, and one for salaried full-time employees.

Rate of Pay: Hourly Full-Time Employees

Test: 9.02% of the employee’s hourly rate of pay as of the first day of the coverage period x 130 hours

Note: The hourly rate of pay is multiplied by 130 regardless of actual hours of service performed. The IRS uses 130 hours of service in a calendar month as a proxy for the 30 hours/week full-time status definition in §4980H.

Example:

Rate of Pay: Salaried Full-Time Employees
Test: 9.02% of the employee’s monthly salary as of the first day of the coverage period
Note: Special rules apply if the employee’s hourly rate or monthly salary is reduced.

Example:

An ALE will meet the rate of pay affordability safe harbor for all full-time employees if the employee-share of the premium for the lowest-cost plan at the employee-only tier does not exceed either of these monthly maximum thresholds. In the examples above, Widget Co.’s plan would be affordable for all full-time employees (hourly and salaried) if the lowest-cost medical plan option does not exceed $234.52/month.

ACA Reporting Under the Rate of Pay Safe Harbor
If the employee waives coverage, the employer will enter Code “2H” (rate of pay affordability safe harbor) in Line 16 to confirm that no B Penalty could apply for the full-time employee.

The 2025 Form W-2 Affordability Safe Harbor
Action Item: This is the least desirable affordability safe harbor because employers cannot make a prospective determination as to whether their offer qualifies. Most employers should try to use the federal poverty line or rate of pay affordability safe harbors (both of which employers can utilize prospectively to set rates prior to the start of the plan year) before assessing the Form W-2 affordability safe harbor.

The Form W-2 affordability safe harbor provides that coverage is affordable if the employee-share of the premium for the lowest-cost plan option at the employee-only tier does not exceed 9.02% of the employee’s Box 1 wages on the Form W-2.

This Form W-2 safe harbor approach has several disadvantages:

In short, the Form W-2 affordability safe harbor is probably well suited only for employers that impose an employee contribution amount based on a fixed percentage of Form W-2 wages throughout the year. However, most ALEs do not structure contribution tiers in this manner》hereby limiting the Form W-2 affordability safe harbor as a viable contender to only a select few employers.

ACA Reporting Under the Form W-2 Safe Harbor
If the employee waives coverage, the employer will enter Code “2F” (Form W-2 affordability safe harbor) in Line 16 to confirm that no B Penalty could apply for the full-time employee.

How Do Flex Credits Affect the Affordability Determination?
Action Item: Employers offering a defined contribution-style flex credit approach should make sure that a sufficient portion is designated as “health flex contributions” to qualify under an affordability safe harbor. This will require the flex credits be non-cashable and designated for health plan purposes only.

Flex credits will reduce the dollar amount of the employee-share of the lowest-cost plan option used to determine affordability only if they meet a three-part test to qualify as a “health flex contribution”:

  1. The employee may not opt to receive the amount as a taxable benefit (i.e., it is not a cashable flex credit);
  2. The employee may use the amount to pay for minimum essential coverage (i.e., the employer’s major medical plan); and
  3. The employee may use the amount exclusively for health coverage costs (e.g., medical, dental, vision, health FSA, HSA).

For example, assume Widget Co. offers flex credits to employees of $500/month. Of the $500, the employee must allocate $300 to the medical, dental, vision, health FSA, or HSA options. $200 of the flex credit amount made available can be allocated to non-health benefits and/or cashed out as taxable income. In that case, only $300 of the flex credits qualify as “health flex contributions” that will be counted as employer contributions for affordability purposes.

How Do Opt-Out Credits Affect the Affordability Determination?
Action Item: Employers offering an opt-out credit should make sure only those employees attesting to other group coverage are eligible to prevent the credit from affecting the offer’s ACA affordability status.

The general rule is that the amount of the opt-out credit must be added to the employee-share of the lowest-cost plan option providing minimum value that is used to determine affordability.

Example: The employee-share of the premium for the employer’s lowest-cost plan option providing minimum value is $100/month for employee-only coverage. The plan offers a $50/month opt-out credit for employees declining enrollment. Under the general rule, the plan costs $150/month ($100/month premium + $50 opt-out credit) for affordability purposes to reflect the $50/month payment employees forgo when electing to enroll.

To avoid the need to add the opt-out credit amount to the cost of the plan, the opt-out credit must meet the definition of an “eligible opt-out arrangement,” which requires:

  1. The opt-out credit is conditioned on the employee declining to enroll in the major medical plan; and
  2. The opt-out credit is conditioned on the employee providing reasonable evidence (including an employee attestation) annually that the employee and all members of the employee’s expected tax family have or will have minimum essential coverage under a group health plan during the period of coverage to which the opt-out credit applies.

Note: In late 2016, the IRS indefinitely delayed these eligible opt-out arrangement rules for opt-out credits in place prior to December 16, 2015.

Summary
 As with most ACA issues, the affordability determination under the employer mandate rules can be complex. However, the determination of which affordability safe harbor most ALEs should use in 2025 is fortunately a relatively straightforward two-step analysis:

  1. The 2025 monthly employee-share of the premium for the lowest-cost major medical plan option at the employee-only tier does not exceed $113.20/month: USE THE FEDERAL POVERTY LINE AFFORDABILITY SAFE HARBOR
  2. The 2025 monthly employee-share of the premium for the lowest-cost major medical plan option at the employee-only tier exceeds $113.20/month: USE THE RATE OF PAY AFFORDABILITY SAFE HARBOR

Employers should always use the federal poverty line affordability safe harbor where available because it results in coverage automatically being deemed affordable with no calculations necessary, and it permits employers to take advantage of streamlined ACA reporting via the Qualifying Offer Method.

In most cases, employers that do not meet the federal poverty line affordability safe harbor will want to utilize the rate of pay affordability safe harbor by following the calculations outlined above. This approach has many significant advantages over the other Form W-2 affordability safe harbor alternative.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).