The IRS has announced a new ACA affordability threshold for plan years beginning in 2025, increasing the percentage from 8.39% to 9.02%. This change is important for Applicable Large Employers (ALEs)—those with 50 or more full-time employees or equivalents—who are required under the ACA to offer affordable, minimum-value health coverage to full-time employees and their dependents to avoid IRS penalties.
What This Means for Employers:
- Affordability Standard: ALEs must ensure that the lowest-cost, self-only coverage plan offered to full-time employees does not exceed 9.02% of the employee’s household income for the taxable year.
Please note that as long as the employer offers at least one health plan option that meets the ACA affordability standard, the employer is not at risk of a penalty, regardless of whether the employee selects coverage or none at all.
- Optional Safe Harbors: Since employers typically do not have access to employees' household income, the IRS provides three safe harbors for determining affordability: the Form W-2 safe harbor, the rate-of-pay safe harbor, and the federal poverty line safe harbor.
- Action Required: ALEs should review and adjust their health plan contribution rates for the 2025 plan year to ensure compliance with the updated affordability standard.
Employers that adjust plan contributions annually to align with ACA affordability standards should take steps now to ensure that at least one health plan option meets the new 9.02% threshold for 2025.
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.