IRS Indexing Adjustments in 2023 for Calculating ACA Affordability

The Internal Revenue Service (IRS) announced its 2023 indexing adjustments used with the Affordable Care Act (ACA) when calculating ACA affordability for employer shared responsibility purposes. ACA affordability refers to the highest percentage of household income the plan participant must pay for a plan premium. The ACA affordability percentage for the 2023 plan year will be 9.12%, down from 9.61% in 2022. The IRS annually adjusts the threshold for calculating ACA affordability. Markedly, the affordability percentage for 2023 is the lowest threshold since the ACA was implemented. Earlier, federal agencies released guidance addressing questions about the ACA and birth control.

Calculating ACA Affordability

The ACA required covered employers to offer affordable health insurance coverage to all full-time employees. Covered employers are those that have, on average, 50 or more full-time employees in the previous calendar year. When calculating ACA affordability, participants rely on the IRS’s indexing adjustments that determine the affordability threshold percentage. In brief, a plan is affordable if the employee’s required contribution for self-only coverage under an employer’s minimum plan is not more than the affordability percentage. This percentage is adjusted every year based on plan premium growth relative to income growth. In the end, covered employers rely on one or more of the following safe harbors in calculating ACA affordability:

• W-2 wages;
• an employee’s rate of pay; and
• the federal poverty line.

Indexing Adjustments in 2023

The IRS released Revenue Procedure 2022-34 which contains the adjusted index of threshold percentages for calculating ACA affordability. In 2023, the affordability percentage is indexed to a record low of 9.12%. This means that plan participants who are within the upper threshold for household income and are eligible for premium tax credits must contribute 9.12% of their household income to the cost of coverage. The applicable percentages across all household income bands as a percentage of the federal poverty line are as follows:

• Less than 133% of the poverty line - 1.92% initial percentage; 1.92% final percentage
• 133% to 150% - 2.88% initial; 3.84% final
• 150% to 200% - 3.84 % initial; 6.05% final
• 200% to 250% - 6.05% initial; 7.73% final
• 250% to 300% - 7.73% initial; 9.12% final
• 300% to 400% - 9.12% initial; 9.12% final

Employee Takeaways

In conclusion, employers need to ensure that any health plan coverage offered falls within the threshold affordability percentage. If coverage for a full-time employee is not affordable under one of the safe harbors previously listed and that employee is approved for a premium tax credit, the employer may be required to contribute a shared responsibility payment. Currently, the IRS is enforcing such shared responsibility payments for tax years 2019 and 2020. Finally, to protect against claims and hefty fines, employers should retain health benefit records for each employee for at least six years after the filing date.