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:
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.
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