IRS Announces 2023 ACA Affordability Indexed Amount

Who doesn’t look forward to new guidance from the IRS ...

The IRS has 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) affordability requirement — will be 9.12% of an employee’s household income, down from the 2022 limit of 9.61%.

This is the lowest amount since the 9.5% indexed affordability threshold was implemented in 2014. 

The 2023 affordability threshold rate was included among health plan tax provisions in IRS Revenue Procedure 2022-34, issued on July 25, 2022. This affordability threshold affects employers’ potential liability for ACA shared-responsibility penalties. It is adjusted annually based on health plan premium growth relative to income growth, using national health expenditure data from the Centers for Medicare & Medicaid Services. 

Say what? 

This measure is used to determine whether employer-sponsored health coverage is considered “affordable” under the ACA. Failure to offer affordable, minimum value coverage to full-time employees may result in penalties for the employer. 

Hey, this is important: The adjusted percentage is applied on a plan year — not a calendar year -- basis. So, plans that run on a non-calendar year (renewals other than 1/1) must continue to use 9.61% to determine affordability in 2023 until their new plan year starts. This means that noncalendar-year plans will continue to use the 2022 rate of 9.61% to determine affordability in 2023 until their new plan year starts.

For example, if your renewal date is 7/1, you would use the higher rate until that date. So for a plan year running:

July 1, 2021 – July 1, 2022: Use the 2021 affordability rate

July 1, 2022-July 1, 2023: Use the 2022 affordability rate

July 1, 2023- July 1, 2024: Use the 2023 affordability rate

Safe harbors 

An employer will not be subject to a penalty with respect to an ACA full-time employee (FTE) if that employee’s required contribution for 2023 for the employer’s lowest-cost, self-only coverage complies with one of the following safe harbors: 

1. W-2 Safe Harbor

The employee’s monthly contribution amount for the self-only premium of the employer’s lowest cost coverage that provides minimum value is affordable if it is equal to or lower than 9.12% of the employee’s W-2 wages (as reported on Box 1 of Form W-2). Application is determined after the end of the calendar year and on an employee-by-employee basis. Box 1 reflects compensation subject for federal income taxes, which would exclude amounts such as employee contributions to a 401(k) or 403(b) plan, and toward other benefits through a cafeteria plan. The W-2 safe harbor can be the trickiest safe harbor to use because it cannot be determined until the end of the year because you need the amount in W-2 Box 1 for the affordability calculation.

2. Rate of Pay Safe Harbor

The employee’s monthly contribution amount for the self-only premium of the employer’s lowest cost coverage that provides minimum value is affordable if it is equal to or lower than 9.12% of the employee’s computed monthly wages. For hourly employees, monthly wages are equal to 130 hours multiplied by their rate of pay. For salaried employees, monthly wages are equal to their monthly salary. 

3. Federal Poverty Level (FPL) Safe Harbor

Coverage is affordable if it does not exceed 9.12% of the FPL. For coverage in 2023 once the plan year starts, coverage is affordable under the FPL safe harbor if the employee monthly cost for self-only coverage in the lowest cost plan that provides minimum value is not more than $103.28 (48 contiguous states), $129.12 (Alaska), or $118.78 (Hawaii). This is based on the 2023 FPL of $13,590 in annual income for a single person. ($13,590 x 9.12% ÷ by 12, rounded to the nearest penny.) For 2022 noncalendar year plans, the required employee contribution cannot exceed $108.83 per month, calculated as 9.61% x $13,590 ÷ 12, rounded to the nearest penny.

Click here for a table on FPL rates. 

Want to learn more? Here is an in-depth (and we mean IN-DEPTH) Q&A about employer shared responsibility provisions under the ACA from the good ole IRS.