The following article first appeared in the Insights section of the Mercer website and is republished here with permission.
According to IRS Rev. Proc. 2024-35, the Affordable Care Act standard for determining the affordability of employer-sponsored health insurance is scheduled to increase significantly to 9.02% of an employee’s household income in the 2025 plan year, up from the 2024 plan year level of 8.39%.
This affordability percentage can affect an individual’s eligibility for federally subsidized insurance from the public insurance exchanges and an employer’s potential liability for shared liability (or “pay or not”) assessments.
Affordability criteria
Under the ACA, employer-provided minimum essential coverage is affordable if an employee’s required contributions for the lowest-cost, lowest-value self-only option do not exceed an annual indexed percentage of the employee’s household income.
Employees and their families covered by the lowest-value employer-sponsored MEC that meets the affordability criteria are not eligible for premium tax credits or cost-sharing reductions for insurance on the public insurance exchanges.
For purposes of determining liability for a play-or-pay assessment, three employer safe harbors permit the substitution of one of the following figures for household income in the ability-to-pay calculation:
W-2 Form Wage Payment Rate Federal Poverty Line
The ability-to-pay percentage used in the employer safe harbor is indexed in the same manner as the household income percentage, in accordance with 2015 IRS guidance (Notice 2015-87, Q&A-12).
Index Expressions
As explained in Rev. Proc. 2014-37, the initial 9.5% home affordability rate will be adjusted annually starting in 2014.
For calendar year 2022 and beyond, the Notice of Benefit and Payment Parameters for 2022 will include how the premium adjustment rate is calculated.
The indexation of the proportion of affordability in 2025 is based on the percentage increase in premiums relative to the percentage increase in revenues from 2013 to 2024, using the most recent National Health Expenditure Accounts revenue and premium data projections.
Taking these projections into account, home affordability in 2025 will be significantly higher than 2024 levels.
Employer Considerations
Employers should reassess employee contributions required for 2025 coverage if they plan to meet the ACA’s solvency limitations under applicable safe harbors.
Many plans that use FPL’s financial affordability safe harbor have different considerations for calendar year and non-calendar year plans.
FPL Safe Harbor for Calendar Year Plans
For calendar year 2025 plans using the FPL financial ability safe harbor, required employee contributions cannot exceed 9.02% of the FPL for a particular geographic area ($15,060 for the continental United States) or $113.20 per month (up from $101.94 in 2024), calculated as (9.02% x $15,060 FPL in 2024) ÷ 12, rounded up to the nearest cent.
Note that the FPL affordability safe harbor contribution limit is higher for employees working in Alaska ($141.39 calculated as 9.02% x 18,810 FPL for 2024) and Hawaii ($130.11 calculated as 9.02% x 17,310 FPL for 2024).
FPL Safe Harbor for Non-Calendar Year Plans
For non-calendar year plans, you may use the FPL in effect up to six months prior to the first day of the plan year.
That is, a non-calendar year plan beginning in February through July 2025 (if 2025 FPL is issued in January) or a non-calendar year plan beginning in March through August 2025 (if 2025 FPL is issued in February) can use either the 2024 FPL of $15,060 (resulting in a monthly FPL payable safe harbor of $113.20) or the 2025 FPL.
These non-calendar year plans would likely benefit from waiting to use the 2025 FPL because they would likely exceed the 2024 FPL, resulting in higher FPL safe harbor contribution limits. [(9.02% x 2025 FPL) ÷ 12].
On the other hand, depending on when the 2025 plan year begins and when the 2025 FPL is issued, waiting for the 2025 FPL may not be practical.
The adjusted percentage is applied based on the plan year, not the calendar year.
This means that non-calendar year plans beginning in 2024 will continue to use 8.39% to determine ability to pay for 2025 until the start of the new plan year.
As discussed above, non-calendar year plans cannot calculate the maximum FPL safe harbor contribution limit for plan years beginning after January 1, 2025, until the Department of Health and Human Services issues the 2025 FPL guidelines.
Please note: For 2024 non-calendar year plans using the continental U.S. FPL affordability safe harbor, required employee contributions cannot exceed $105.29 per month, calculated as (8.39% of 2024 FPL x $15,060 in 2024 FPL) ÷ 12, rounded up to the nearest cent.
About the authors: Dorian Smith is a partner and national practice leader in Mercer Law Firm’s Law & Policy Group. Cheryl Hughes is a principal in the firm’s Law & Policy Group.
