Is health coverage affordable? It depends who you ask.
“The question is,” said Alice, “whether we can make the words mean so many different things.
“The question is,” said Humpty Dumpty, “who should be the master, that’s all.
—Lewis Carroll, Through the Looking Glass, Alice in Wonderland, Chapter VI: Humpty Dumpty
Is health coverage affordable? It depends who you ask. And as Humpty Dumpty would say, “that’s what being master is all about.” When it comes to employer compliance, the IRS is the master when it comes to defining “affordable.”
I quote Humpty in light of the Internal Revenue Service’s recent update to the definition of “affordable” for employee contributions for health coverage in 2024 – see Revenue procedure 2023-29. The IRS lowered the affordability percentage from 9.12% to 8.39%. To avoid employer-imposed tax penalties, an “applicable large employer” must offer at least one “affordable,” “minimum essential coverage,” and “minimum value” coverage option. (An affected large employer in 2024 is an employer that had 50 or more full-time equivalent employees on business days in 2023.)
More on meeting this requirement below, after understanding what the IRS means when it uses the word “affordable.”
“Affordable” health reform
Under the tax code, health coverage affordability is determined as a percentage of a household’s modified adjusted gross income (MAGI). The IRS recognizes that employers do not know the employee’s household MAGI. In fact, most employees don’t know their own MAGI.
Thus, the IRS offers “safe harbors” based on the employee’s income with each employer.
The percentage for 2024 is 8.39%, a seemingly significant decrease from 2023’s 9.12%. One of the safe harbor calculations is based on the federal poverty level, where employees’ contributions for single coverage are “affordable” if they are less than $101.93 per month – calculated (for lower 48 states, Hawaii and Alaska are higher) as follows: $14,580 (federal poverty level) x 0 .0839 = $1,223.26 / 12 = $101.93.
Note: Since the federal poverty level increased significantly from 2022 to 2023 (from $13,590 to $14,580 in the lower 48 states), the $101.93 limit is only $1.35/ months less than the limit of $103.28 for 2023! The IRS offers two other safe harbor calculations (e.g., wage rate, Form W-2).
Keep in mind that an ALE must only offer eligible coverage to “full-time” employees and all eligible children up to age 26 (coverage does not need to be offered to a spouse ). Providing “affordable” “minimum essential coverage” and “minimum value” is enough to avoid penalties – employees do not need to opt in. The sanctions imposed by the employer are as follows:
- IRC §4980H(a)—The “penalty:” THE 2024 A penalty is $247.50/month ($2,970 annualized) multiplied by all full-time employees (reduced from the first 30). It applies when the ALE does not provide minimum essential coverage to at least 95% of its full-time employees in a given calendar month and is triggered when a full-time employee who has not not seen offering minimum essential coverage (regardless of its affordability or minimum value) enrolled in taxpayer-subsidized coverage on the public exchange.
- IRC §4980H(b) – “Penalty B:” THE 2024 Penalty B is $371.67/month ($4,460 annualized) per full-time employee with subsidized coverage on the exchange. This applies when the ALE is not subject to Penalty A, for each full-time employee who was not offered affordable minimum essential coverage of a minimum value and who subsequently purchased coverage subsidized from the public purse.
A take: Under a cafeteria plan, flex credits or opt-out credits that employees can choose to take as taxable compensation will reduce the affordability safe harbor. To avoid triggering tax penalties:
- Flexible credits must be limited so that the employee can only use them to pay premiums for health coverage or as contributions to a health FSA or health savings account – and cannot be received as taxable salary, and
- Opt-out credits should be limited to employees who confirm that they (and their eligible dependents) have other group coverage that constitutes minimum essential coverage.
Is compliance difficult?
This is not necessarily the case. There’s not much to worry about – few employers will need (or want) to adjust employee contributions based on their current coverage – except for those already at the 2023 cap.
Please remember that the monetary limit described above only applies to employee-only coverage.
The Biden administration “solved” what it called the family problem by changing the rules so that employer-sponsored plans with higher family contributions would not disqualify family members from state-subsidized coverage. taxpayers in the context of public exchanges.
That is, some employers may increase the employee’s contribution to cover a child or spouse in order to make coverage “unaffordable” (according to the Family Glitch) so that those individuals can consider “opting out” and giving them access, give them the choice, if they want, to enroll in less expensive, taxpayer-subsidized coverage through public exchange.
Regarding the reserved employee contribution, 8.39% of salary is already much more than what most employees contribute. For someone making $25,000 per year, 8.39% works out to about $175/month or $2,100/year. For comparison, the average the employee contribution was $1,401/year or $116.75/month for all projects in 2023. THE median is probably much less.
Most importantly, an employer only has to offer one option, namely “minimum affordable essential coverage of minimum value” to avoid the tax penalty.
Improve engagement with appreciation
Some plan sponsors have taken steps to highlight the value of their coverage by comparing the options they currently offer with what health reform defines as a minimum – what qualifies as “affordable,” minimum essential coverage” or “minimum value”.
You can adopt a coverage option that meets the minimums, avoids tax penalties, that no one will select, and that demonstrates why your plan provides significantly more value than health reform requires.
Consider the coverage presented here as an “anchor” of behavioral economics, an option to offer in addition to what you currently offer.
Option Name: Health Reform
Eligible: eligible employee and children up to age 26 (not spouse)
Minimum essential coverage: preventive services plus routine clinical trial expenses.
Minimum value (2023):
- Networked:
- Deductible: $9,100/$18,200
- Maximum spending: $9,100/$18,200
- Off-grid:
- Deductible: $9,100/$18,200
- Coinsurance: 50%
- Maximum spending: $18,200/$36,000
In-network and out-of-network cost sharing do not cross-apply.
Employee contribution:
- Single: 8.39% of household modified adjusted gross income (MAGI) in 2024, including MAGI for all covered by the plan (during enrollment, associate must agree to provide household income information with an actual amount at the end of year 2024) – where the contribution throughout the per calendar year would represent 8.39% of all direct after-tax compensation. For example, coverage reserved for employees requires a contribution based on annual earnings equal to:
- Annual earnings of $25,000: $175/month, $2,100/year
- Annual earnings of $50,000: $350/month, $4,200/year
- Annual earnings of $100,000: $700/month, $8,400/year
- Not Single – Child(ren): As for single, plus 100% of the per person cost to cover each child, all contributions are after-tax (assuming $400/month/child).
- Annual earnings of $25,000, 1 child: ~$575/month
- Annual earnings of $50,000, 1 child: ~$750/month
- Annual earnings of $100,000, 1 child: ~$1,100/month
Anyone would find such coverage inadequate – with those premiums, after taxes, using an in-network deductible of $9,100/$18,200.
You don’t have to offer this option if you don’t want to meet affordability requirements and avoid employer tax penalties. You may just need to show your coverage, side by side, against the health reform minimums – to confirm the generosity of your coverage.
Employees will be able to easily recognize the value of the coverage you offer and how it far exceeds what health reform requires.
