Home ACA Compliance ACA Affordability Drops to Historic Low for 2023 Tax Year

ACA Affordability Drops to Historic Low for 2023 Tax Year

3 minute read
by Robert Sheen

Last week the IRS announced the affordability percentage for Premium Tax Credits (PTCs) and employee contributions for employer-sponsored health coverage. 

In IRS Rev. Proc 2022-34, the agency makes clear that the ACA affordability percentage for the 2023 tax year will be 9.12%. The new ACA affordability threshold is down from 2022’s 9.61%. In fact, the 2023 amount is the lowest affordability percentage the IRS has set since the ACA’s Employer Mandate requirements first went into effect in 2015.

As such, employers extending health plans to their ACA full-time workforce beginning January 1, 2023, must ensure the contribution amount is no more than 9.12% of their household income. 

Of particular importance to employers is the fact that this lower ACA affordability threshold means employers will need to contribute more toward employee health premiums. The reason for this is that the affordability percentage dictates the maximum amount an employee can contribute towards healthcare. And with a lower threshold, employers will need to contribute more.

ACA affordability penalties

As a reminder, ensuring ACA affordability is key to avoiding penalties under IRC Section 4980H(b) of the ACA’s Employer Mandate, which the IRS is currently issuing via Letter 226J.

Under the ACA’s Employer Mandate, Applicable Large Employers (ALEs), or employers with 50 or more full-time employees and full-time equivalent employees must:

  • Offer Minimum Essential Coverage to at least 95% of their full-time employees (and their dependents) whereby such coverage meets Minimum Value; and 
  • Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability

Employers can receive IRS penalties for offering unaffordable plans. The trigger for the IRS identifying this non-compliance is anytime an employee obtains a PTC from a state or federal health exchange

The ACA penalty amounts for the 2023 tax year have not yet been released, but the 4980H(b) amount for the 2022 tax year is $4,120 annualized, per employee.

More PTCs are on the way

A bill known as the Inflation Reduction Act is currently working its way through the legislature. It would extend the enhanced PTC subsidies through 2025 and in turn, result in more PTC allocations. Employers should give special attention to their ACA Compliance efforts as more PTCs are issued in the coming years.

The IRS is also ramping up its ACA enforcement efforts, as it recently noted substantial progress on clearing its historic backlog. As an indicator of its progress, it’s begun issuing Letter 5699 warning notices for the 2020 tax year. Letter 226J penalties are expected to follow.

Furthermore, the agency for the first time ever is requesting detailed calculations of ALE full-time counts during ACA audits. This level of granularity indicates the agency is crossing its t’s and dotting its i’s when it comes to verifying ACA compliance.

If you need help implementing ACA affordability for the upcoming reporting year, completing 2022 ACA reporting, improving ACA compliance, or appealing a penalty notice, contact us to learn about our full-service solution, ACA Complete. We’ve helped thousands of organizations improve their ACA compliance processes, eliminate over $1 billion in penalty assessments, and most importantly, reduce the burden of ACA compliance on their staff.

For best practices on calculating ACA affordability, download the Safe Harbor Playbook for Calculating ACA Affordability below.

Download: ACA Safe Harbor Playbook

For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.

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