August 19, 2022

A Watch on Affordability - IRS Adjusts Figure Applicable to Employer Mandate

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Key Takeaways

  • The Employer Shared Responsibility Provisions under the ACA require applicable large employers to pay an assessment under the Internal Revenue Code if they fail to offer health coverage to their full-time employees that meets certain standards.

The Employer Shared Responsibility Provisions (commonly known as the "employer mandate") under the Affordable Care Act (ACA) require applicable large employers to pay an assessment under the Internal Revenue Code if they fail to offer health coverage to their full-time employees that meets certain standards. Those standards include a requirement that the coverage be affordable to full-time employees. For coverage to be affordable, an employee's contribution toward the cost of coverage may not exceed 9.5 percent of the employee's household income. The 9.5 percent figure is adjusted each year based on data as to how health premiums have changed in relation to changes in income. Historically, the cost of health coverage has risen faster than income, and the affordability percentage has been higher than 9.5 percent.

In a recent Revenue Procedure, the IRS announced that, based on recent data, there would be a significant decrease in the percentage for 2023. The new percentage will be 9.12 percent. As a result, some employers may find that the contributions that low-wage employees must pay for coverage under their health plans in 2023 will cause that coverage to be deemed unaffordable. If that occurs, the employer will need to pay an assessment for each full-time employee who forgoes employer coverage and instead obtains subsidized coverage through an ACA health insurance exchange. That assessment is calculated for each month in which coverage remains unaffordable. For 2022, the amount was $343.33 per month ($4,120 for an entire year).

The employer mandate applies only to "applicable large employers," meaning employers with at least 50 full-time employees (or part-time employees, where a part-time employee counts as a fraction of a full-time employee based on hours worked).

If your organization is an applicable large employer, you may be gearing up for annual enrollment and determining how much to charge employees for health coverage in 2023. In making that determination, you may wish to take the new affordability percentage into account. This evaluation may be particularly important if you employ a significant number of low-wage workers, who may opt out of plan coverage to seek subsidized coverage through an exchange.

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