It is September and the IRS has finally released the affordability threshold percentage for the filing year 2025. As you know, fall is open enrollment season, and it is generally when employees elect their health insurance benefits for the upcoming calendar year. If you are a benefits professional, you will soon be
providing new health plan details, including costs, to your enrollees. Please read on for how those health plan details – and costs (!) – affect compliance with the Affordable Care Act (ACA).
The 2025 Affordability Percentage was released on September 6, 2024, and it increased to 9.02% from 8.39% in the filing year 2024. You can find the IRS publication here.
Will the plans offered be affordable under the ACA for the 2025 filing year? – this should be one of the first questions employers ask and it is critical to have a definitive answer. Our calculation examples below would help to answer that question. The affordability penalty for the 2025 filing year decreased from its predecessor in 2024 to be $4,350 annually or $362.50 per month. This is a 3% reduction and might affect an employer’s decision to pay or play when offering affordable coverage.
What does it mean to me as a benefit professional, you would ask? It means that if an employer offers an unaffordable health plan (the single lowest cost used on line 15 of the 1095-C form) and the employee waives that offer and enrolls into subsidized coverage (also known as The Exchange or Marketplace), the employer will be penalized for every month for which coverage was unaffordable and the employee was enrolled into subsidized coverage.
Affordability Percentage Calculation Examples:
Example 1:
Peter is an hourly employee making $13.50 per hour. His employer offers a high deductible health plan (HDHP) at $178.95 per month as his lowest cost single plan option. Here is how the affordability is calculated:
Hourly Rate x 130 Hours (ACA FT hours threshold) x 9.02% = Affordable Single Plan
$13.50 x 130 x 9.02% = $158.30
As you can see, Peter can only afford a plan that would cost $158.30 per month and not the HDHP offered by the organization with a monthly cost of $178.95.
If Peter waives his coverage and goes to the Exchange and gets the subsidized coverage for all of 2025, the employer can potentially be penalized $4,350.00. Let’s see how much the company would have to spend to make sure that the coverage is affordable for Peter:
$178.85 – $158.30 = $20.55 per month per employee or $246.60 per year.
If Peter is the only employee making $13.50, perhaps, it would make sense to the employer to raise his hourly rate to avoid $4,000 plus penalty in the future. However, if there are 100 employees like Peter or 1,000, the employer would have to incur $24,660.00 (with 100 employees in the tier) or $246,600 (with
1,000 employees in the tier) in guaranteed premium expenses to potentially avoid future penalties for those who will waive unaffordable coverage and go to the Exchange if the employer does nothing. This is the case when the employer makes a choice – to pay now or “play” and take the risk in hopes to never pay in the future.
Example 2:
Lucy is a salaried employee making $24,598 per year. Her employer offers an HDHP at $178.95 per month as her lowest cost single plan option. Here is how the affordability is calculated:
(Annual Salary/12 months) x 9.02% = Affordable Single Plan
($24,598.00/12) x 9.02% = $184.89
As you can see, Lucy can barely afford the HDHP offered by the organization with a monthly cost of $178.95.
Steps to Minimize Potential Affordability Percentage Penalties:
- Review all hourly pay rates and salaries and make sure your ACA compliance provider (Paragon Compliance clients, please review with your Account Manager) has an accurate representation of your workforce.
- Contact your ACA compliance provider (Paragon Compliance LLC) to work with you to determine which option – pay or play – would work best for your organization and your annual budget.
- Make sure that you have a waiver on file from Peter (and any employee in the same pay rate category) where he indicates his alternative coverage.
- If Peter indicates that he has chosen to enroll in subsidized coverage, please alert your ACA compliance provider. If you are a client of Paragon Compliance LLC, please contact your Account Manager right away.
- You can use the W-2 Box 1, amount when filing 2025 1095-C forms if you expect Peter to work a lot more than the IRS ACA FT hours threshold of 130 hours per month. In this instance, you would be able to utilize the W-2 affordability method rather than the Rate of Pay affordability method. This method can help avoid potential penalty of $4,350.00 in the future.
- Your ACA compliance provider should present you with potential penalties for all the months of unaffordable coverage in the 2025 filing year. Paragon Compliance provides a report to its clients that calculates the employer’s risk with a potential penalty amount.
- If you did get a 226-J letter for any year prior to 2024 filing – contact us as soon as possible – we are here to help you work with the IRS on mitigating any penalties your organization might be facing.
Penalties can be scary and confusing, but with the experts at Paragon Compliance, your fears will be reduced or even eliminated altogether! Please contact us to see how we can help you with the current filing year 2024 and beyond.
How can Paragon Compliance help?
Let us help you – please reach out to clientservices@paragoncompliancellc.com for a quote or call us today!