2023 Affordability Percentages Decreased
On Aug. 1, 2022, the IRS issued Revenue Procedure (Rev. Proc.) 2022-34 to index the contribution percentages in 2023 for determining the affordability of an employer’s plan under the Affordable Care Act (ACA).
For plan years beginning in 2023, employer-sponsored coverage will be considered affordable if the employee’s required contribution for self-only coverage does not exceed:
- 9.12% of the employee’s household income for the year for purposes of both the pay or play rules and premium tax credit eligibility. This is the most substantial decrease in this percentage since these rules were implemented (down from 9.61% in 2022). It is the lowest that this percentage has ever been set, at 0.38% below the statutory affordability percentage of 9.5%.
- 8.17% of the employee’s household income for the year for purposes of an individual mandate exemption (adjusted under separate guidance). This is a slight increase from 2022, which was set at 8.09%. Although this penalty was reduced to zero in 2019, some individuals may need to claim an exemption for other purposes.
Important Dates
Aug. 30, 2021
IRS Rev. Proc. 22-34 substantially decreased the ACA’s affordability contribution percentage for 2023 for purposes of the pay or play rules and premium tax credit.
Jan. 1, 2023
The updated percentages are effective for plan years beginning Jan. 1, 2023.
Action Steps
The updated affordability percentages are effective for taxable years and plan years beginning Jan. 1, 2023. The updated affordability percentage for the pay or play rules and premium tax credit is the most significant decrease since these rules were implemented. As a result, many employers may have to substantially lower their employee contributions for 2023 to meet the adjusted percentage. The affordability percentage for the individual mandate exemption increased slightly from 2022.
Overview of the Affordability Requirement
Under the ACA, the affordability of an employer’s plan may be assessed in the following three contexts:
- The employer shared responsibility penalty for applicable large employers (ALEs) (also known as the pay or play rules or employer mandate);
- An exemption from the individual mandate tax penalty for individuals who fail to obtain health coverage; and
- The premium tax credit for low-income individuals to purchase health coverage through an Exchange.
Although all these provisions involve an affordability determination, the test for determining a plan’s affordability varies for each provision.
The IRS has previously adjusted the affordability contribution percentage each year, beginning with 2015. The adjusted affordability contribution percentage for purposes of the individual mandate exemption is announced separately in the Notice of Benefit and Payment Parameters final rule for each year.
Affordability Adjustments
This chart illustrates the adjusted affordability percentages for each purpose since 2014. Each provision is described in more detail following the chart.
| Purpose | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|---|---|---|---|---|
|
Employer Shared Responsibility Rules |
9.5% |
9.56% |
9.66% |
9.69% |
9.56% |
9.86% |
9.78% |
9.83% |
9.61% |
9.12% |
|
Individual Mandate Exemption |
8% |
8.05% |
8.13% |
8.16% |
8.05% |
8.3% |
8.24% |
8.27% |
8.09% |
8.17% |
|
Premium Tax Credit Availability |
9.5% |
9.56% |
9.66% |
9.69% |
9.56% |
9.86% |
9.78% |
9.83% |
9.71% |
9.12% |
Employer Shared Responsibility Rules
Under the ACA, employees (and their family members) who are eligible for coverage under an affordable employer-sponsored plan are generally not eligible for the premium tax credit. This is significant because the ACA’s employer share responsibility penalty for ALEs is triggered when a full-time employee receives a premium tax credit for coverage under an Exchanged.
To determine an employee’s eligibility for a tax credit, the ACA provides that employer-sponsored coverage is considered affordable if the employee’s required contribution for self-only coverage does not exceed 9.5% of the employee’s household income for the tax year. After 2014, this required contribution percentage is adjusted annually to reflect the excess rate of premium growth.
The ACA’s employer shared responsibility or pay or play rules require ALEs to offer affordable, minimum value health coverage to their full-time employees (and dependents) or pay a penalty. The affordability of health coverage is a key point in determining whether an ALE will be subject to a penalty.
These rules generally determine the affordability of employer-sponsored coverage by reference to the rules for determining premium tax credit eligibility. Therefore, for 2014, employer-sponsored coverage was considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage did not exceed 9.5% of the employee’s household income for the tax year. This affordability percentage was adjusted to:
- 9.56% for 2015 plan years;
- 9.66% for 2016 plan years;
- 9.69% for 2017 plan years;
- 9.56% for 2018 plan years;
- 9.86% for 2019 plan years;
- 9.78% for 2020 plan years;
- 9.83% for 2021 plan years; and
- 9.61% for 2022 plan years.
For 2023, Rev. Proc. 22-34 significantly decreases the affordability contribution percentage to 9.12%. This means that employer-sponsored coverage for the 2023 plan year will be considered affordable under the employer shared responsibility rules if the employee’s required contribution for self-only coverage does not exceed 9.12% of the employee’s household income for the tax year.
This substantial reduction in the employees’ Affordability percentage, along with a tight work force, puts added pressures on employers to provide a comprehensive benefits package at an affordable cost and employers must assume a larger portion of the employee cost of benefits programs offered.
Your team at Sentinel can help you navigate the changing seas surrounding your benefits program. Connect with a Sentinel Benefits Consultant today to learn more about Safeguarding Your Success.
