How is affordability determined for an employer’s group health plan?

Under §4980H, applicable large employers, or ALEs, (50 or more full-time equivalents (FTEs)) must offer coverage to full-time employees that is affordable to avoid potential §4980H(b) penalties. In addition, individuals enrolling for coverage through a public Marketplace will not qualify for a premium tax credit to assist with the cost of coverage if they are eligible for employer-sponsored group health plan coverage that is affordable. 

For purposes of eligibility for a premium tax credit toward coverage through a public Marketplace: 

• Coverage is generally considered “affordable” for the employee if the employee contribution for employee-only (single) coverage does not exceed a set percentage (8.39% in 2024) of household income.  
• Effective January 1, 2023, coverage is considered “affordable” for family members if the employee contribution for the family to participate in the employer-sponsored plan does not exceed a set percentage (8.39% in 2024) of household income.  

Each year, the IRS adjusts the percentage used to determine affordability. The percentage can go up or down from one year to the next, potentially requiring employers to adjust employee contributions to meet affordability each year. The affordability percentage applies based on plan year, allowing employers with non-calendar year plans to adjust employee contributions upon plan renewal rather than having to make adjustments each January. For example, the 8.39% for 2024 for a September through August plan year would have to use 8.39% to calculate affordability beginning in September 2024.  

An ALE will meet §4980H(b) requirements if the employee contribution for employee-only (single) coverage is affordable; there is no requirement for an employer to make coverage affordable for family members. In addition, even if single coverage is unaffordable for an employee based on their personal household income, coverage is considered “affordable” under §4980H(b) requirements if the employee contribution satisfies at least one of three available safe harbors (i.e., Federal Poverty Level (FPL), Rate of Pay, or Form W-2). 

Employers may use any of the three affordability safe harbors for any reasonable category of employees, provided the same safe harbor is used on a uniform and consistent basis for all employees in a category. The regulations provide that reasonable categories for this purpose generally include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide business criteria. The following are the three available affordability safe harbors:

• FPL – Employee contribution does not exceed 8.39% (in 2024) of FPL for a single individual.
• Rate of Pay – Employee contribution does not exceed 8.39% (in 2024) of hourly rate x 130 (or monthly salary).
• Form W-2 – Employee contribution does not exceed 8.39% (in 2024) of 2024 Box 1 wages.

TIP: When determining which affordability safe harbor to use, employers should first consider the FPL safe harbor because it is the simplest and guarantees affordability for all employees. If the monthly employee contribution for single coverage does not meet the FPL safe harbor, then the employer should consider the rate of pay or Form W-2 safe harbor which will often allow for a larger employee contribution to be deemed affordable depending on employee compensation levels.

Content for the WEX compliance Q&A is provided by Benefit Comply, LLC. Benefit Comply provides employee benefits compliance support and services to brokers, employee benefits consultants, and TPAs nationwide. For more information go to www.benefitcomply.com.

The information in this blog post is for educational purposes only. It is not legal or tax advice. For legal or tax advice, you should consult your own legal counsel, tax and investment advisers. 

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