ACA Affordability Rates Announced for 2025

With the issuance of Rev. Proc. 2024-35 on September 6, 2024, the IRS announced the 2025 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 9.02% for plan years beginning with January 1, 2025. This represents an increase from 2024’s 8.39%, which may in turn cause many employers to have to modify their employee contributions to accommodate the adjusted 2025 percentage.

Under the ACA’s provisions for plan years beginning January 1, 2025 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 9.02% of the employee’s household income for the tax year. The methodology here is important, as a determination of employer-sponsored coverage being deemed “affordable” helps employers comply with the employer shared responsibility rules under the §4980H employer mandate. Neglecting to offer affordable, minimum value coverage could result in penalties under §4980H(a) or (b), respectively referred to as the “sledgehammer” and “tack hammer” penalties.

Applicable large employers (ALEs) --- employers with 50 or more full-time equivalent employees (FTEs) --- are required to comply with the employer mandate and must offer coverage to full-time employees along with their dependent children*. An offer of coverage is not mandated for spouses and dependents. As such, the offer of coverage under an employer-sponsored group health plan must be deemed affordable and must provide minimum value at the employee-only coverage level.

As expounded upon in IRS Notice 2015-87, employers may measure affordability of their coverage using one of three different ACA safe harbors. As noted above, the affordability test applies to annual premiums for self-only coverage. Therefore, if an employer offers multiple health plans, the affordability test will be 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. The three available safe harbors are the federal poverty level (FPL), rate of pay, or Form W-2. More details on each individual safe harbor as follows:

Federal Poverty Level (FPL)

• In 2025, calendar year plans offering a medical plan option that costs employees working in the contiguous U.S. no more than $113.20 per month for employee-only coverage will automatically meet the ACA affordability standard under the FPL safe harbor.
• This deems coverage affordable for all FTEs and permits employers to use the Qualifying Offer method for more streamlined ACA reporting.
• Please note that for employees working in Alaska the 2025 rate is $141.38 per month and the rate in Hawaii is $130.11 per month, representing an increase from $127.31 and $117.25 in 2024, respectively.
• 1/15/2025 UPDATE: HHS has recently released the FPL guidelines for 2025, which will soon be published in the Federal Register. For plan years beginning on February 1 through December 31, 2025, the maximum amount an employer can charge employees in the “lower 48” states for self-only coverage and still be deemed affordable under the FPL safe harbor is $117.63 per month (up from $105.29 for non-calendar year plans starting in 2024). Beyond the lower 48, the non-calendar year FPL threshold is $135.22 per month for Hawaii employees (up from $121.02 per moth for non-calendar year plans beginning in 2024) and $146.95 per month for Alaska employees (up from $131.51 per month for non-calendar year plans beginning in 2024).

Rate of Pay

• Employers that do not offer a medical plan option meeting the 2025 FPL safe harbor (i.e., the lowest cost-plan option at the employee-only tier costs employees more than $113.20 per month) should consider using the Rate of Pay method.
• Under this safe harbor, the maximum amount an employer can charge for self-only coverage and still be considered affordable is based on the employee’s lowest hourly rate of pay for hourly full-time employees or the lowest monthly salary for salaried full-time employees.
• More specifically calculated, the offer of coverage to a non-hourly employee will be treated as affordable in a calendar month if the employee’s costs do not exceed 9.02% of 1/12 of their annual salary.
• The calculation utilizes the employee’s rate of pay as of the first day of the coverage period, unless the rate of pay is reduced, in which case the lower amount is used instead.

Form W-2

• Under the Form W-2 safe harbor, the employee’s annual contribution for single coverage is considered affordable if it is less than or equal to 9.02% if the employee’s Form W-2 Box 1 wages.
• This method is determined after the calendar year and takes the employee’s Box 1 wages (i.e., taxable wages, reported tips, bonuses, etc.) and their employee contributions throughout the full calendar year into account.
• If an employer is using this safe harbor to set employer contributions, the employer would have to base affordability on an estimate of Box 1 wages for the year.
  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, 2025 will continue to use the 8.39% standard until their new plan year begins.

Employers should be actively preparing their 2025 contribution strategy with their broker/consultant team now to craft their approach to the ACA affordability safe harbor requirements.