The IRS has released a new benchmark rate of 9.12% to determine affordability of employer-sponsored health benefits (such as ICHRAs) offered in 2023. This is down from 9.61% for 2022 and is the lowest affordability rate to date.
This rate was established by the Affordable Care Act (ACA). Under the ACA there are two penalties that can be assessed to employers regarding insufficient offering of health coverage:
- The “A Penalty”: applied to Applicable Large Employers (ALEs – companies with 50 or more full-time or full-time equivalent employees) when they fail to offer comprehensive health coverage to substantially all of their full-time employees (generally 95%);
- The “B Penalty”: applied to ALEs that offer health benefits that are not considered affordable; the calculation to determine affordability uses this new rate of 9.12%
Together, these two penalties make up what is known as the “employer mandate”.
An ICHRA can help employers 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. 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 ACA’s shared responsibility payments.
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 9.12% 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 for an employee, the IRS has set three safe harbors for these large employees to determine if their 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: an employer may substitute an employee’s household income with box 1 from the employee’s W-2 form.
Details on each of these safe harbors, along with examples, can be found in the Resources section on our website in the ICHRA – Details section (look for Affordability Rules and Premium Tax Credit Eligibility area).
Offering an ICHRA is a great way to avoid both of these penalties. Plus ICHRAs offer more cost control for employers and freedom of choice for employees. There is also no minimum for participation. So if you don’t know if you will get enough people signing up for health coverage, start with an ICHRA. Call your broker today and ask them about a Nexben ICHRA.