Our ACA Software Helps Ensure Coverage is Affordable Based on IRS Criteria
This post is for Applicable Large Employers (ALEs) required to comply with the Affordable Care Act. We hope you find it useful.
Applicable Large Employers (ALEs) must provide qualifying, affordable health coverage to applicable employees and dependents or face potentially steep ACA penalties.
The IRS recently announced the 2023 tax year indexing adjustment percentage for determining affordability, which will be set at 9.12% for the 2023 calendar year. This amount is a decrease from 9.61% in 2022.
The affordability threshold is used to determine if an employer’s lowest-premium health plan meets the ACA’s affordability requirement.
ALEs may need to adjust employee contributions for the new percentage and contribute more towards employee monthly premiums.
Our comprehensive ACA Software alerts when offers of coverage are needed, and it helps ensure that coverage falls within the affordable range based on IRS criteria.
Affordability Percentage Test
According to Keenan.com, “As expounded upon in IRS Notice 2015-87, employers may measure affordability of their coverage using three different safe harbor tactics (Form W-2 wages, the employee’s rate of pay, or the federal poverty line (FPL)).
The affordability test applies to annual premiums for self-only coverage. If an employer offers multiple health plans, the affordability test is applicable to the lowest-cost option satisfying the requirement for minimum value.
In situations where an employer offers distinct regional coverage options for employees in different states, the affordability analysis would be based on the lowest-cost option open to those specific employees. The affordability percentage is indexed in the same manner as the household income percentage.
As noted above, the adjusted percentage is applied on a plan year (not calendar year) basis, so non-calendar year plans with plan years prior to January 1, 2023 will continue to use the 9.61% standard until their new plan year begins.”
The Marketplace Threshold
The ACA affordability percentage change for employers for 2023 was likely a delayed result of 2021 American Rescue Plan. The 2021 and 2022 exchange affordability thresholds were above 9.5%, and it’s possible that the Premium Tax Credits from the American Rescue plan influenced the change.
The expanded Premium Tax credits from the American Rescue Plan allow enrollees with moderate incomes to pay no more than 8.5 percent of their incomes toward premiums.
The federal and state exchange thresholds are separate from the affordability threshold used by employers. However, the IRS has stated that employers’ affordability thresholds should be consistent with the ACA marketplace thresholds, though it didn’t lower the affordability percentage all the way down to the 8.5% cap used in state and federal ACA exchanges for qualifying individuals.
The 9.12% threshold for employers for the 2023 tax year is an adjustment that more closely aligns with the marketplace cap, but doesn’t affect employers as much as the full adjustment to an 8.5% cap would.
The ACA Times explains that “the IRS has previously confirmed that the affordability that employers leverage and the affordability threshold set for the ACA marketplaces should be consistent…the lower affordability percentage for the 2023 tax year is an effort to demonstrate consistency.
Instead of dropping the ACA affordability percentage to the exact 8.5% that individuals experience through the ACA exchanges, the IRS explains that it is not required because ‘the Department of the Treasury and the Internal Revenue Service have determined that the failsafe exception described in 36B(b)(3)(A)(ii)(III) [from IRS Notice 2015-87] applies for plan years beginning in the calendar year 2023.’
Essentially, the 9.12% threshold for the 2023 tax year is the result of the agency adjusting affordability to align [more closely] with the marketplace percentage, while still giving consideration to the impact it could have on employers as they set contribution amounts for employees.”
The recently passed Inflation Reduction Act has resulted in a continuation of the marketplace 8.5% affordability cap through December 31, 2025. The cap amount can fluctuate, and it’s important to stay on top of any changes so you can adjust for new employee contribution rates in advance.
If you are tasked with ACA compliance management, our comprehensive IRS-certified ACA software can simplify the entire process.
Passport Software’s ACA Software
If you’re overwhelmed by manually tracking ACA employee data, underwhelmed by your current ACA solution, or doing all the work on behalf of your payroll provider, we can help. Our comprehensive IRS-certified ACA software streamlines compliance year-round, alerts when offers of covers needed, and helps you ensure those offers are considered affordable under IRS criteria.
Our ACA Full Service option handles everything for you, including filing – just provide a spreadsheet with employee data, and we do the rest. We also provide penalty relief consultation and have helped many companies avoid or drastically reduce penalties.
Passport Software’s US-based customer support is friendly and knowledgeable, and we can help you select an option that is right for your company and any ACA related questions you may have.