With the issuance of Rev. Proc. 2022-34, the IRS announced the 2023 indexing adjustment percentage for determining affordability of employer-sponsored health coverage under the Affordable Care Act (ACA). The percentage is adjusted annually for inflation and will be set at 9.12% for plan years beginning with January 1, 2023. This represents a substantial decrease from 2022’s 9.61%, which may in turn cause many employers to have to reduce their employee contributions to accommodate the adjusted 2023 percentage.
Under the ACA’s provisions for plan years beginning January 1, 2023 and subsequent to that date, employer-sponsored minimum essential coverage will only be considered affordable if an employee’s required contribution for the lowest-cost, self-only coverage option does not exceed 9.12% of the employee’s household income for the tax year. Neglecting to offer affordable, minimum value coverage to full-time employees could result in penalties under §4980H(a) or (b) of the employer shared responsibility rules, commonly referred to as the “sledgehammer” and “tack hammer” penalties, respectively.
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.