The Affordable Care Act (ACA) is a comprehensive healthcare reform law enacted in 2010. One of its primary goals is to ensure that health insurance is affordable and accessible to all Americans. The ACA affordability percentage is a vital component of the legislation that applies to many small businesses, and has been updated for 2023. Here we will delve into the 2023 ACA affordability percentage and discuss the potential consequences some small businesses may face if they fail to make their group medical insurance affordable.

The 2023 ACA Affordability Percentage

The ACA affordability percentage is an essential factor in determining whether an employer’s health insurance plan is considered “affordable” under the ACA’s employer mandate. For 2023, the Internal Revenue Service (IRS) has set the affordability percentage at 9.12%. This percentage is a slight increase from 9.61% in 2022.

To determine whether an employer’s health insurance plan is affordable, the employee’s share of the premium for the lowest-cost, single-only plan offered by the employer should not exceed 9.12% of their household income. Employers can use one of the three safe harbors provided by the IRS to determine affordability: the employee’s W-2 wages, the employee’s rate of pay, or the federal poverty level (FPL).

Consequences for Employers

Employers who fail to offer affordable health insurance plans to their employees face potential consequences under the ACA’s employer mandate. These consequences come in the form of Employer Shared Responsibility Payment (ESRP) penalties, which vary depending on the specific circumstances.

• The “No Coverage” Penalty. In general, if an employer with at least 50 full-time equivalent employees (FTEs) does not offer minimum essential coverage to at least 95% of its full-time employees and their dependents, and at least one employee receives a premium tax credit to purchase coverage through a health insurance marketplace, such as healthcare.gov, the employer will be subject to the “no coverage” penalty. For 2023, the no coverage penalty is calculated as $2,880 per full-time employee, excluding the first 30 employees. This amount is adjusted annually for inflation.

• The “Unaffordable Coverage” Penalty. If an employer offers coverage but fails to meet the affordability threshold, they may be subject to the “unaffordable coverage” penalty. This penalty is triggered when at least one employee receives a premium tax credit to purchase coverage due to the employer’s unaffordable coverage. For 2023, the unaffordable coverage penalty is $4,320 per employee receiving a premium tax credit. This amount is also adjusted annually for inflation.

Complying with the ACA affordability requirements is crucial for employers to avoid costly penalties. By understanding the 2023 ACA affordability percentage and ensuring their health insurance plans meet these guidelines, employers can protect their businesses from financial risks while contributing to a healthier workforce. Employers are encouraged to review their current health insurance offerings, communicate with employees about their options, and seek professional guidance when necessary to ensure they remain compliant with the ACA’s affordability standards.

This information is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2023 Angus McRae Insurance Brokerage Services, Inc. All rights reserved.