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Home ACA Analysis Understanding ACA Affordability for 2023 Tax Year

Understanding ACA Affordability for 2023 Tax Year

4 minute read
by Joanna Kim-Brunetti

Since ACA reporting was first required by employers in 2015, the affordability component under the Employer Mandate was established each year by indexing the standard of 9.5%.

This has always been the case, that is, until now. The ACA affordability percentage for the 2023 tax year is 9.12%, a historic low, and a significant drop from 2022’s 9.61%. As a result of the lower percentage, employers will need to contribute more toward their employees’ monthly health insurance premiums next year. 

So, why for the first time is the ACA affordability percentage that employers use for determining health insurance contributions so far below the 9.5% index amount? The answer is largely reflective of healthcare changes made as part of the American Rescue Plan.

What does the American Rescue Plan do to ACA affordability?

First passed in March 2021, the American Rescue Plan introduced enhanced Premium Tax Credits (PTCs) that allow individuals with incomes at 400% and beyond the Federal Poverty Level (FPL) to obtain health coverage through the state and federal health exchange for no more than 8.5% of their household income. Individuals who earn less than 150% of the FPL also benefit from the enhanced PTCs and can obtain coverage for as little as $0 a month.

As a result of the enhanced PTCs, healthcare access across the country improved greatly, helping millions of Americans obtain quality, affordable coverage. In fact, the current uninsured rate is at an all-time low of 8%

Now, the 8.5% cap on an individual’s household income only applies to consumers obtaining coverage through a state or federal health exchange. It does not extend to the ACA affordability threshold that employers rely on for setting employee contributions.

Following the passage of the American Rescue Plan, there was speculation that the reduced affordability cap of 8.5% would influence how the IRS indexes ACA affordability for employers, but neither the 2021 or 2022 ACA affordability thresholds changed. In fact, both were well above 9.5%. 

As of June this year, there were no signs that the IRS was going to reduce the corresponding ACA affordability percentage to the 8.5% consumers were experiencing through the health exchanges.

IRS drastically lowers ACA affordability for 2023

Nearly 18 months after the American Rescue Plan passed, the IRS appears to be adjusting ACA affordability for employers to align with the 8.5% individual cap. What sparked this?

For one, it is possible that the enhanced PTCs passed via the American Rescue Plan curbed the rate at which health insurance premiums increase, which is why the 2023 ACA affordability threshold for employers is significantly lower than in previous years. After all, the agency does make clear in Rev. Proc 2022-34 that the affordability percentages are indexed based on the premium growth rates, in relation to the income growth rates.

More so, however, is the fact that the IRS has previously confirmed that the affordability that employers leverage and the affordability threshold set for the ACA marketplaces should be consistent. IRS Notice 2015-87 makes this clear. So in essence, the lower affordability percentage for the 2023 tax year is an effort to demonstrate consistency.

IRS methodology

Instead of dropping the ACA affordability percentage to the exact 8.5% that individuals experience through the ACA exchanges, the IRS explains that it is not required because “the Department of the Treasury and the Internal Revenue Service have determined that the failsafe exception described in § 36B(b)(3)(A)(ii)(III) applies for plan years beginning in the calendar year 2023.” 

Essentially, the 9.12% threshold for the 2023 tax year is the result of the agency adjusting affordability to align with the marketplace percentage, while still giving consideration to the impact it could have on employers as they set contribution amounts for employees.

So, why didn’t the IRS update the employer affordability percentages for the 2021 and 2022 tax years? 

It’s possible that the agency recognized that while the new law’s reduced affordability cap to 8.5% implicitly dictates a benefit for the employee, it does not necessarily dictate a converse burden on the employer. After all, the lower the cap, the less the employee has to pay and, conversely, the more the employer has to pay. 

As a practical matter, given the originally temporary nature of the 8.5% cap under the American Rescue Plan, which only applied for the 2021 and 2022 years, and its enactment in March of 2021, the agency may not have had sufficient time to change the affordability thresholds for employers. 

Biden signs the Inflation Reduction Act into law

The enhanced PTCs first made available via the American Rescue Plan are now available through December 31, 2025, as a result of Biden signing the Inflation Reduction Act into law on August 16, 2022. Individuals will continue to be able to obtain coverage through health exchanges for no more than 8.5% of their household income. Additionally, the PTCs will continue to be available for households in excess of 400% of the FPL.

With the recent IRS Rev. Proc 2022-34, the 8.5% baseline affordability cap for employers is now aligned with that for employees.

Looking ahead

ACA affordability is a complex topic, and because the amount is adjusted each year, it can be a moving target for employers. Best practices encourage planning ahead. For the 2023 tax year, consider revisiting your employee premium contribution structure now to ensure you’re giving yourself adequate time to establish rates that are affordable for your workforce. 

As a reminder, IRS safe harbor calculations rely on the annual ACA affordability percentage. These safe harbors prove to the IRS that an offer of coverage was affordable for the employee and subsequently assist in helping prevent 4980H(b) penalty assessments. The IRS is currently issuing Employer Mandate non-compliance penalties 4980H(a) and 4980H(b) via Letter 226J.

Under the ACA’s Employer Mandate, Applicable Large Employers, 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 the Minimum Value 
  • Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability

If you need assistance establishing ACA affordability for any reporting year, contact us to learn about ACA Complete. Our full-service solution removes the ACA compliance burden on your staff by handling everything for you. So far we’ve helped our clients prevent over $1 billion in ACA penalties.

For more information on how to apply the IRS safe harbor to prove 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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