September 15, 2022
Many employers will soon begin preparing the final details for the 2023 open enrollment season. This year employers will need to pay particular attention to the employee’s share of the premium payment for health coverage. The 2023 plan year will have the lowest Affordable Care Act affordability threshold to date, 9.12 percent. The remainder of this article will explore the details employers need to be aware of for the 2023 plan year and discuss some strategies employers can implement to minimize IRC section 4980H exposure.
Since the IRC section 4980H penalties went into effect in 2015, the lowest the affordability threshold has been is 9.56 percent. Importantly, the affordability threshold in 2022 was 9.61 percent which is almost a half percent higher than the 2023 affordability threshold. Consequently, for premium tax credit purposes in 2023 an employer’s coverage is considered affordable if the employee’s contribution level for self-only coverage does not exceed 9.12 percent of the employee’s household income.
The government recognized employers usually would not be able to determine an employee’s household income as a spouse’s or dependent’s income in addition to the employee’s income from other jobs and investments will not be known by the employer. To assist employers with this problem the government created three safe harbor provisions, which are discussed in great detail in our previous publication. If an employer satisfies the requirements of one of the safe harbors, the offer of coverage will be viewed as affordable for employer mandate purposes regardless of whether it is in fact affordable based on the employee’s household income. We thought it would be beneficial to briefly explore how the drop in the affordability threshold would impact each of the three affordability safe harbors using real numbers.
The first affordability safe harbor an employer may utilize is referred to as the Form W2 safe harbor. It is a popular safe harbor to use because it is the method that is generally the most far reaching for employers. Under the Form W2 safe harbor, an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.12 percent of that employee’s Form W2 wages (box 1 of the Form W2) from the employer for the calendar year. At the end of the year the employer determines this safe harbor on an employee-by-employee basis. The chart below demonstrates how the affordability threshold has dropped for different box 1 amounts comparing 2022 and 2023.
|Form W2 Wages||2022 Monthly Affordability Threshold||2023 Monthly Affordability Threshold|
The second affordability safe harbor is the rate of pay safe harbor. The rate of pay safe harbor can be broken into two tests, one test for hourly employees and another test for salaried employees. For hourly employees, an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.12 percent of the product of the employee’s hourly rate of pay and 130 hours. When determining the employee’s hourly rate of pay, use the lower of the employee’s hourly rate of pay on the first day of the coverage period or the employee’s lowest hourly rate of pay during the calendar month.
|Rate of Pay||2022 Monthly Affordability Threshold||2023 Monthly Affordability Threshold|
For salaried employees, an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.12 percent of the employee’s monthly salary. This safe harbor cannot be used if the employee’s monthly salary is reduced. An employer may use any reasonable method for converting payroll periods to monthly salary.
|Salaried Monthly Wages||2022 Monthly Affordability Threshold||2023 Monthly Affordability Threshold|
The final affordability safe harbor is the federal poverty line safe harbor. Under the federal poverty line safe harbor, an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.12 percent of the monthly Federal Poverty Line (FPL) for a single individual. An employer should use the Federal Poverty Line for the State in which the employee is employed. As the chart below demonstrates, fortunately, the Federal Poverty Line rose just enough so that the 2023 amount is slightly higher than the 2022 amount regardless of location.
|State||2022 Monthly Affordability Threshold||2023 Monthly Affordability Threshold|
As a result of the lower affordability threshold in 2023, many employers could benefit from tying the cost of their lowest-cost, self-only coverage to the affordability threshold percentage for the applicable year. The final regulations specifically allow an employer to base an employee’s contribution amount on a “consistent percentage of all Form W2 wages…” (see section 54.4980H-5(e)(2)(ii)(A)). Therefore, an employer could guarantee it will always meet the Form W2 affordability safe harbor by utilizing a consistent percentage that is less than or equal to the required contribution percentage (9.12 percent in 2023) for the applicable tax year.
Alternatively, an employer could set up an offer of coverage that provides coverage at the lesser of a fixed cost (for example $150 per month) or 9.12 percent of the employee's box 1 Form W2 wages. This strategy will also always make the employers offer of coverage affordable. If an employee of any employer rejects coverage and signs the offer clearly rejecting the affordable coverage offered, any appeal for that particular employee will be simple. With proper documentation of this strategy, any appeal related to the IRS rejecting the Form W2 affordability safe harbor, something that has been occurring quite frequently, would be easy.
As a result of the drop in the lowest affordability threshold ever, employers need to double check to make sure their 2023 offers of coverage are affordable. If an employer fails to meet the affordability threshold, the employer could be subject to a section 4980H(b) penalty. Should you have any questions about determining the affordability of a plan or how Accord Systems can assist you with your ACA reporting needs, please don’t hesitate to contact us.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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