ACA’s affordability threshold will be lower in 2023

The IRS announced that the Affordable Care Act’s affordability threshold for employer-sponsored group health plans will be 9.12 percent in 2023. Employers with 50 or more full-time or full-time equivalent employees (Applicable Large Employers or ALEs) must recognize that next year’s affordability threshold will be lower than this year’s, which is 9.61 percent. This means that a group health plan that was affordable in 2022 may be unaffordable in 2023, despite being exactly the same. Many ALEs will need to adjust their group health plan contribution requirements to avoid potential ACA penalties in 2023.

ALEs are generally required to offer full-time employees “affordable” minimum essential health care coverage to avoid the ACA’s employer shared responsibility (pay-or-play) penalty. Affordability is calculated as a percentage of household income. To be affordable in 2023, an employee’s required contribution for the lowest-cost, self-only coverage option offered by their employer (regardless of which coverage option is actually selected) cannot exceed 9.12 percent of that employee’s household income.

Since employers typically do not know their employees’ household incomes, ALEs can use one of the ACA’s affordability safe harbors to determine the most employees can be required to pay without exceeding the affordability threshold. For example, let’s assume Jordan works 40 hours per week for 52 weeks, earning $10 per hour. The most Jordan can be required to pay for the lowest-cost, self-only coverage option offered by Jordan’s employer in 2023 is:

• $158.08 per month (W-2 Safe Harbor Method);
• $118.56 per month (Rate of Pay Safe Harbor Method); or
• $103.28 per month (Federal Poverty Line Safe Harbor Method—2022).

If Jordan earned $15 per hour, Jordan’s required contribution for the lowest-cost, self-only coverage option cannot exceed:

• $237.12 per month (W-2 Safe Harbor Method; “Box 1”);
• $177.84 per month (Rate of Pay Safe Harbor Method); or
• $103.28 per month (Federal Poverty Line Safe Harbor Method—2022).

The affordability threshold for group health plans beginning in 2023 is only a fraction of a percent lower than 2022’s threshold, but the consequences for ALE’s that fail to adapt accordingly can be substantial. To ensure compliance with the ACA’s affordability requirement in 2023, ALEs need to evaluate and possibly adjust their health plan pricing options, cost-sharing structure, and in some cases, compensation levels.

The Human Equation prepares all risk management and insurance content with the professional guidance of Setnor Byer Insurance & Risk.