IRS Sets 2023 ACA Affordability Threshold at 9.12%

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Employer Shared Responsibility Rules  

The Affordable Care Act’s (ACA’s) employer shared responsibility or “pay or play” rules require Applicable Large Employers (ALEs) to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty.  

These rules generally determine affordability of employer-sponsored coverage by reference to the rules for determining premium tax credit eligibility. Therefore, for 2023, employer-sponsored coverage is considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage does not exceed 9.12% of the employee’s household income for the tax year.  

Affordability Safe Harbors  

Employers may use an affordability safe harbor to measure affordability of their coverage. The three safe harbors measure affordability based on Form W-2 wages from that employer, the employee’s rate of pay or the federal poverty line (FPL) level for a single individual.  

The affordability test applies only to the portion of the annual premiums for self-only medical coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.  

• Under the FPL method, a self-only 2023 plan will be affordable if the employee premium does not exceed $103.28 (using 2022 lookback FPL level of $13,590).  
• Under the Rate of Pay method for employees earning an hourly wage of $15.50 (CA minimum wage in 2023), a self-only plan will be affordable if the employee premium does not exceed $183.77.  
• Under the W2 method for employees with an annual W2 Box 1 wage of $38,000 per year, a self-only plan will be affordable if the employee premium does not exceed $288.80.  

Note that for non-calendar year plans, the affordability threshold for the prior calendar year must be used for the month(s) that proceed the plan year start. For example, for a plan year that starts June 1st, the threshold of 9.61% (2022) must be used for the months of January – May. 

The Importance of Affordable Employer-Sponsored Coverage  

Under the ACA, employees (and their family members) who are eligible for coverage under an affordable employer-sponsored plan are generally not eligible for a premium tax credit for coverage under an Exchange (e.g. Covered California). This is significant because the ACA’s employer shared responsibility penalty for ALEs is triggered when a full-time employee receives a premium tax credit for Exchange-based coverage in any given month.  

ALEs that do not offer a health plan that provides minimal essential coverage to at least 95% of their full time employees and dependents may be subject to penalties under section 4980H(a) of $229.17 per month, or $2,750 annualized, multiplied by the sum of all full time employees, less the first 30.  

Plans that are not deemed “affordable” may be subject to penalties under section 4980H(b) of $343.33 per month, or $4,120 annualized.  

These penalties are based on 2022 levels and will be adjusted by the IRS for 2023. 

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This information is general and is provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.