A significant update has come from the Internal Revenue Service (IRS) regarding the Affordable Care Act (ACA) affordability percentage for 2025. After three consecutive years of decreasing percentages, the IRS has announced an increase for the upcoming year.
The IRS has set the ACA affordability percentage at 9.02% for the year 2025. This is an increase from the previous year’s 8.39% and is used to determine if an employer’s health plan is affordable under the ACA. The affordability percentage is indexed annually and reflects the maximum amount of household income that an employee can be expected to pay for self-only coverage.
Under the ACA, individuals may qualify for a premium tax credit (PTC) if their employer does not offer affordable coverage that provides minimum value. This means that if the cost of an employer’s health plan exceeds a certain percentage of an employee’s household income, the employee could be eligible for subsidies when purchasing insurance through a marketplace. Employers need to be aware of this as they could be subject to an Employer Shared Responsibility Payment (ESRP) if a full-time employee receives a PTC.
To assist employers in complying with affordability requirements, the ACA provides three safe harbors: the Rate of Pay, IRS Form W-2, and Federal Poverty Line (FPL). These safe harbors offer methods for employers to determine if their health plan costs are within the affordability threshold. If an employee’s self-only coverage cost is within these limits, their employer is not liable for an ESRP.
The increase in the affordability percentage to 9.02% for 2025 means that employers may have additional flexibility in setting their employee premiums. However, they must still ensure that the premiums qualify for a safe harbor. This change is particularly relevant for employers using the FPL safe harbor, as they will need to set an employee-only premium rate of $113.20 or less for plan years beginning in 2025 to meet the affordability requirement.
Employers should take proactive steps to review their health insurance premium rates in light of the new affordability threshold. It is advisable to work with brokers and/or consultants to ensure compliance with the ACA regulations. Employers using the Rate of Pay or Form W-2 safe harbors will also need to evaluate their premiums in the context of the new 9.02% threshold.
The increase in the ACA affordability percentage for 2025 is a critical update employers must consider when planning their health insurance offerings. By understanding the implications of this change and reviewing their premium rates accordingly, employers can avoid potential penalties and ensure that their health plans are both compliant and affordable for their employees. As the regulatory environment continues to change, staying informed and prepared is key to successful health plan administration.
Stay tuned for more updates and insights on employer health plans and ACA compliance.
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