September 18, 2024

The 2025 open enrollment season is rapidly approaching. Earlier this month the IRS released Rev. Proc. 2024-35 which, among other items, set the affordability threshold for employers in 2025. In order to avoid a potential section 4980H(b) penalty an employer must make sure one of its plans provides minimum value and is offered at an affordable price. An actuary will determine whether the minimum value threshold has been satisfied and this is generally not an issue for employers. However, an employer is in control as to whether the plan it is offering meets the affordability threshold.

As explained thoroughly in our previous affordability publication, a plan is considered affordable under the ACA if the employee’s contribution level for self-only coverage does not exceed 9.5 percent of the employee’s household income. This 9.5 percent threshold is indexed for years after 2014. In 2025 the affordability threshold will rise to 9.02 percent.

The following chart displays the movement of the affordability percentage since the ACA’s inception:

According to Internal Revenue Code (IRC) section 36B(c)(3)(v)(A)(1), an employer-sponsored plan is affordable for an employee if the portion of the annual premium the employee must pay, whether by salary reduction or otherwise (required contribution) for self-only coverage does not exceed the required contribution percentage (9.02 percent in 2025) of the applicable taxpayer’s household income for the taxable year. An individual’s household income is the taxpayer’s modified adjusted gross income plus the aggregate modified adjusted gross income of all other individuals who are included in the taxpayer’s family who are required to file a tax return (see section 1.36B-1(e)). 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. Unfortunately, as discussed thoroughly in a previous publication, the IRS is holding employers to a higher standard than the ACA allows.

An employer wishing to use one of the affordability safe harbors will use the 2025 affordability threshold of 9.02 percent when determining if the safe harbor has been satisfied. The first affordability safe harbor an employer may utilize is referred to as the form w-2 safe harbor. Under the form w-2 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 9.02 percent of that employee’s form w-2 wages (box 1 of the form w-2) from the employer for the calendar year.

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 9.02 percent of the product of the employee’s hourly rate of pay and 130 hours. 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 9.02 percent of the employee’s monthly salary.

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 9.02 percent of the monthly Federal Poverty Line (FPL) for a single individual.

Employers who are not careful with the affordability of their plans may be exposed to massive penalties under IRC section 4980H(b). Should you have any questions on 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. 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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