The Affordable Care Act (ACA) benchmark for determining the affordability of employer-sponsored health coverage will significantly decrease to 9.12% of an employee's household income for the 2023 plan year — down from the 2022 plan-year level of 9.61%, according to IRS Rev. Proc. 2022-34 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 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:
- Form W-2 wages
- Rate of pay
- Federal poverty line (FPL)
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. Before 2020, this adjustment reflected the ratio of the premium growth rate for employer-sponsored health coverage to the national income growth rate in the previous year. For calendar years 2020 and 2021, the method of calculating the “premium adjustment percentage” changed to capture premium increases for both individual-market policies and employer-sponsored health coverage. For calendar years 2022 and beyond, the Notice of benefit and payment parameters for 2022 reverts back to the pre-2020 method of calculating the premium adjustment percentage.
Because the 2023 affordability percentage is indexed based on the rates of premium growth relative to the rates of income growth from 2013 to 2022, using the most recent National Health Expenditure Accounts (NHEA) income and premium data projections, the 2023 affordability percentage will drop below the 2022 level.
Employers should review the required employee contribution for 2023 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.
FPL safe harbor for calendar-year plans
For 2023 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 9.12% of theFPLfor a particular area — $13,590 for mainland US — or$103.28 per month(slightly up from $103.15 in 2022), calculated as (9.12% x $13,590 FPL for 2022) ÷ 12, rounded to the nearest penny. [Note that we initially projected the 2023 required contribution percentage would be 9.7%, resulting in a 2023 FPL affordability safe harbor contribution limit of $109.85. This was based on 2021 Centers for Medicare & Medicaid Servicesguidance, which used NHEA income and premium data projections for 2019–2028. In Rev. Proc. 2022-34, IRS instead uses the most recent NHEA projections for 2021–2030 to determine the required contribution percentage.]
FPL safe harbor for noncalendar-year plans
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 to July 2023 (if the 2023 FPL is issued in January) or noncalendar-year plans starting in March to August 2023 (if the 2023 FPL is issued in February) may use either the 2022 FPL of $13,590 — resulting in a FPL affordability safe harbor of $103.28 per month — or the 2023 FPL. These noncalendar-year plans would likely benefit from waiting to use the 2023 FPL because it will probably exceed the 2022 FPL and yield a higher FPL safe harbor contribution limit [(9.12% x 2023 FPL) ÷ 12]. On the other hand, depending on when the 2023 plan year starts and the 2023 FPL is issued, waiting for the 2023 FPL may not be practicable.
The adjusted percentage applies on a plan-year — not calendar-year — basis. This means noncalendar-year plans will continue to use 9.61% to determine affordability in 2023 until their new plan year starts. As described above, noncalendar-year plans won't be able to calculate the FPL safe harbor contribution limit for plan years beginning after Jan. 1, 2023, until the Department of Health and Human Services issues the 2023 FPL guidelines. As a reminder, for 2022 noncalendar-year plans using the mainland US FPL affordability safe harbor, the required employee contribution cannot exceed $108.83 per month, calculated as (9.61% for 2022 x $13,590 FPL in 2022) ÷ 12, rounded to the nearest penny.
Non-Mercer resources
- Rev. Proc. 2022-34 (IRS, Aug. 1, 2022)
- Q&As on employer shared-responsibility provisions under the Affordable Care Act — affordability (see Q&A-40) (IRS, May 9, 2022)
- Poverty guidelines for 2022 (HHS, Jan. 21, 2022)
- Premium adjustment percentage, maximum annual limitation on cost sharing, reduced maximum annual limitation on cost sharing, and required contribution percentage for the 2023 benefit year (CMS, Dec. 28, 2021)
- Employer shared-responsibility provisions (IRS, Nov. 23, 2021)
- Final notice of benefit and payment parameters for 2022, Part 2 (HHS, May 5, 2021)
- Notice 2015-87 (IRS, Feb. 16, 2015)
- Rev. Proc. 2014-37 (IRS, July 24, 2014)
Mercer Law & Policy resources
- Mercer projects 2023 figures for ACA affordable employer coverage (Feb. 15, 2022)
- IRS outlines how individual-coverage HRAs can meet ACA employer mandate (Oct. 29, 2019)
FAQs
The Affordable Care Act (ACA) benchmark for determining the affordability of employer-sponsored health coverage will significantly decrease to 9.12% of an employee's household income for the 2023 plan year — down from the 2022 plan-year level of 9.61%, according to IRS Rev. Proc.
What is the affordability threshold for the 2023 employer health plan? ›
The IRS announced that the 2023 health plan affordability threshold—used to determine if an employer's lowest-premium health plan meets the Affordable Care Act's (ACA's) affordability requirement—will be 9.12 percent of an employee's "household income," down from the 2022 limit of 9.61 percent.
What is the affordability percentage for the Affordable Care Act? ›
In 2024, a job-based health plan is considered "affordable" if your share of the monthly premium in the lowest-cost plan offered by the employer is less than 8.39% of your household income. The lowest-cost plan must also meet the minimum value standard.
How to calculate ACA affordability 2023 IRS? ›
The W-2 Safe Harbor is a method for proving ACA affordability that involves using an employee's W-2 Box 1, gross income. To calculate ACA affordability using the W-2 Safe Harbor, use the following formula: W-2 Box 1 Wages multiplied by 8.39% with an adjustment for partial-year coverage.
What is the penalty for ACA affordability 2023? ›
Penalty for Unaffordable Coverage
If, in 2023, a full-time employee is not offered an affordable plan with minimum value and chooses instead to enroll in a subsidized Marketplace plan, a penalty of $4,320 per full-time employee applies.
What does the affordability percentage refer to? ›
The Affordability Ratio (AR) metric quantifies the percentage of a representative household's income that would be used to pay for an essential utility service, after non-discretionary expenses such as housing and other essential utility service charges are deducted from the household's income.
What is the ACA 9.5 affordability test? ›
Originally set at 9.5 of an employee's household income, the IRS adjusts the premium affordability threshold annually for inflation. For 2022, it was adjusted to 9.61 percent of an employee's household income. For 2023, the premium affordability threshold falls to 9.12 percent of an employee's income.
How do you determine affordability under the ACA? ›
To calculate this, multiply the employee's household income by 8.39%. For example, if the employee's household income is $50,000, the affordability threshold would be $4,195 ($50,000 x 8.39%).
What is the affordability limit? ›
Less Than 25% of disposable income
Based on the information provided you are spending less than one quarter of your monthly disposable income paying your basic housing costs. This level of spending is generally deemed to be affordable.
What is the affordability threshold for the 2024 health plan? ›
The IRS recently announced the ACA affordability threshold for the 2024 tax year and it's significantly lower than last year's, which was a historic low at the time. In IRC Rev. Proc. 2023-29 the agency establishes the 2024 ACA affordability threshold as 8.39%.
Employers must offer health insurance that is affordable and provides minimum value to 95% of their full-time employees and their children up to the end of the month in which they turn age 26, or be subject to penalties.
What is the ACA trend for 2023? ›
As of June 2023, about 24.5 million adults were enrolled in the ACA Medicaid expansion group. States that adopted the expansion have dramatically lowered their uninsured rates and reduced state spending on uncompensated care.
Is there a ACA subsidy cliff in 2023? ›
The ACA's “subsidy cliff” has been eliminated through 2025. The American Rescue Plan eliminated the subsidy cliff in 2021 and 2022. What is the subsidy cliff and who did it affect? Younger Americans affected by the subsidy cliff also see relief.
What is the employer mandate for affordability in 2023? ›
For 2023 calendar-year plans using the FPL affordability safe harbor, the required employee contribution cannot exceed 9.12% of the FPL for a particular area — $13,590 for mainland US — or $103.28 per month (slightly up from $103.15 in 2022), calculated as (9.12% x $13,590 FPL for 2022) ÷ 12, rounded to the nearest ...
How to calculate ACA penalty for employers? ›
For example, an employer with 100 FTEs offers coverage that meets the minimum essential coverage requirements but 10 employees pay more than 9.5 percent of their W-2 wages (safe harbor) – AND the employees obtain a subsidy for coverage in the California Exchange – then the employer would pay a fine for each employee ...
How can employers avoid ACA tax penalties? ›
Track and measure employee hours to determine full-time employee status. Offer at least minimum essential coverage to full-time employees and dependents and document those offers of coverage. To avoid insufficient offer penalties, offer affordable coverage that is at least minimum value.
What is the minimum income for 2023 healthcare gov? ›
2023 filing requirements for most taxpayers: Gross income of at least $13,850 (individuals) or $27,700 (married filing jointly). Different thresholds apply for dependents, people 65 and older, and those who use other tax filing statuses (like married filing separately). Refer to glossary for more details.
What is the ACA out-of-pocket limit for 2023? ›
2023 ACA and HSA-qualified HDHP requirements for out-of-pocket maximums. The maximum annual limits on cost sharing that a group health plan can impose for 2023 is $9,100 for self-only coverage and $18,200 for family coverage.
What is the IRS threshold for 2024 health plan premium affordability? ›
The IRS announced that the 2024 health plan affordability threshold—which is used to determine if an employer's lowest-premium health plan meets the Affordable Care Act's (ACA's) affordability requirement—will be 8.39 percent of an employee's household income. That's down from this year's 9.12 percent figure.
What is the payroll limit for 2023? ›
Social security and Medicare tax for 2023.
The social security wage base limit is $160,200. The Medicare tax rate is 1.45% each for the employee and employer, unchanged from 2022. There is no wage base limit for Medicare tax.
