IRS Releases New Affordability Rate of 8.39% for 2024
August 29, 2023
On August 23, 2023, the Internal Revenue Service (IRS) issued Revenue Procedure 2023-29. In this document, the IRS decreased the affordability rate for large employers to 8.39% for 2024. This is down from 9.12% for 2023.
Affordable Care Act Provisions
The Affordable Care Act (ACA), under the “employer mandate,” generally requires Applicable Large Employers (ALEs) to offer comprehensive health coverage to their full-time employees (30+ hours per week) and dependent children. ALEs are companies with 50 or more full-time equivalent employees. Employers may be subject to steep penalties (i.e., shared responsibility payments) for failing to offer health coverage to substantially all of their full-time employees or for not offering full-time employees coverage that is affordable and provides a certain minimum level of coverage.
An ICHRA can help ALEs satisfy the employer mandate:
- First, by offering an ICHRA to substantially all (generally 95%) of its full-time employees, the employer can avoid the larger of the two employer mandate penalties.
The “A Penalty” for non-compliance will generally result in an annual penalty of $2,970 per employee, minus the first 30 employees.
- Furthermore, if the ICHRA offered by an employer to substantially all full-time employees is “affordable,” then the employer can also avoid the second type of employer mandate penalty. If the ICHRA is deemed unaffordable, the employer may be subject to the second type of employer mandate penalty.
The “B Penalty” for non-compliance will generally result in an annual penalty of $4,460.00 per employee who enrolls in coverage through the Exchange and receives a premium tax credit.
An ICHRA is considered affordable for an employee if the monthly premium for the lowest-cost silver plan for self-coverage only (on the exchange in the employee’s primary site of employment) minus the monthly amount made available to the employee under the ICHRA (not including any increased amount made available under the ICHRA based on the number of covered dependents), is less than 8.39% (9.12% in 2023) of 1/12 of the employee’s annual household income.
Since affordability is based on household income and employers don’t necessarily know the household income of an employee, the IRS has set three safe harbors for large employees to determine if the ICHRA offering is affordable:
- Federal Poverty Line: an employer may substitute an employee’s household income with the federal poverty line in the affordability calculation.
- Rate of Pay: an employer may substitute an employee’s household income with the hourly rate of the lowest-paid full-time employee.
- W-2 Form Wages: an employer may substitute an employee’s household income with box 1 from the employee’s W-2 form.
Understanding How the New Rate Impacts ALEs
Employers planning for their 2024 group health plans need to understand the impact of the new percentage. An ICHRA considered affordable in 2023 may not be in 2024. Employers could avoid this penalty risk with proper preparation.
Example: Jack’s W-2 Wages are $35,000, and the lowest-cost silver plan is $650, the lowest allowance considered affordable for Jack in:
2023 is $384/month
($35,000/12) x .0912 = $266
$650 – $266 = $384
2024 is $406/month
($35,000/12) x .0839 = $244
$650 – $244 = $406
When reviewing contribution strategies for the 2024 plan year, employers should pay close attention to the affordability of the ICHRA as they set employee contributions for the coming plan year. Employers with contribution allowances close to the affordability threshold in 2023 should determine how many of those employees’ contributions will be deemed unaffordable in 2024 because of the decrease in affordability percentage.
Based on that analysis, employers may adjust their employee contribution allowance accordingly to limit their exposure to penalties.
Nexben does not provide legal guidance, and the information provided should not be considered or taken as legal advice. The information is a summary of laws and regulations relating to employee benefit plan compliance. In all cases, employers should consult with their own legal counsel.