On Aug. 23, 2023, the IRS announced (in Revenue Procedure 2023-29) the affordability level for employee contributions for an employer’s group healthcare plan under the Affordable Care Act (ACA) was reduced. For plan years beginning on or after Jan. 1, 2024, employer-sponsored coverage will be considered affordable under the ACA’s pay-or-play rules if the employee’s required contribution for self-only coverage does not exceed 8.39% of their household income for the year.
The ACA’s pay-or-play rules require applicable large employers (ALEs) to offer minimum essential coverage to at least 95% of their full-time employees (and dependents – children up to age 26) or pay a penalty. In addition, the coverage must be of minimum value and be “affordable” for individual coverage. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty. An ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% (as adjusted) of the employee’s household income for the taxable year. This percentage is adjusted annually based on health plan premium growth rates in relation to income growth rates.
In recent years, the affordability percentage has been gradually reduced:
The affordability test applies only to the portion of the annual premiums for self-only coverage and does not include any additional costs for family coverage. If an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that provides the minimum value.
The potential penalty is not dependent on which plan, if any, the employee chooses. The penalty applies if the employer does not offer an affordable plan to an employee and the employee then obtains subsidized healthcare coverage on an ACA Exchange.
Because an employer generally will not know an employee’s household income, the IRS has provided three optional affordability safe harbors that ALEs may use to determine affordability based on information that is available to them:
For 2024, the affordability percentage significantly decreases to 8.39%. This means employer-sponsored coverage for the 2024 plan year will be considered affordable under the pay-or-play rules if the employee’s required contribution for self-only coverage does not exceed 8.39% of the employee’s household income for the tax year.
This is another substantial decrease in this percentage and is the lowest this percentage has ever been set (at more than 1% below the statutory affordability percentage of 9.5%). As a result, many employers may have to significantly lower the amount they require employees to contribute in 2024 to meet the adjusted percentage.
Employers have recently started to receive notices from their health insurance issuers and TPAs confirming that their contracts do not contain gag clauses prohibited by the CAA but noting, in general, that they are not going to be responsible for the reporting of the attestation and leaving that to the employer. Employers, naturally, need clarification about the issue.
One requirement of the CAA was to prohibit health plans and insurance issuers from entering into contracts with health care providers, third-party administrators (TPAs), or other service providers that would restrict the plan or issuer from providing, accessing, or sharing certain information about provider price and quality and de-identified claims.
A gag clause is a contractual term that directly or indirectly restricts specific data and information that a health plan or issuer can make available to another party. Effective Dec. 27, 2020, the CAA generally prohibits group health plans and issuers offering group health insurance from entering into agreements with health care providers, TPAs, or other service providers that include certain gag clause language. Specifically, these contracts cannot restrict a plan or issuer from:
For example, if a contract between a TPA and a health plan proves that the plan sponsor’s access to provider-specific cost and quality-of-care information is only at the discretion of the TPA, that contractual provision would be considered a prohibited gag clause.
Plans and issuers must ensure that their agreements with health care providers, networks, or associations of providers, TPAs, or other service providers offering access to a network of providers do not violate the CAA’s prohibition on gag clauses.
While employers with fully insured plans can rely on the issuer to provide that attestation if the carrier will do so, many carriers are unwilling to file the attestations on behalf of the plans. Employers with self-funded plans can have their TPAs file the attestation on their behalf, but the employer is ultimately responsible for a complete filing.
The Departments launched a website through the Centers for Medicare and Medicaid Services for health plans and issuers to submit their gag clause compliance attestations. The Departments have also provided instructions for submitting the attestation, a system user manual, and a reporting entity Excel template for plans and issuers to submit the required attestation; all are available here. The first year of implementation may confuse many. It is a good idea to try to submit the attestation once the carrier reports its status to the employer.
Employers should consult with their advisors regarding the appropriate pricing for individual coverage to meet the new affordability level and work to submit their attestation on the CMS website.
This Legal Update is not intended to be exhaustive, nor should any discussion or opinion be construed as legal advice. Readers should contact legal counsel for legal advice. All rights reserved.