ACA Affordability Rules During Open Enrollment – Insights for HR Professionals

Are you an HR professional entering open enrollment season? Here’s information to know about ACA affordability rules.

Updated August 8, 2023 to include link to 2023 ACA Affordability Percentage

Open enrollment season – HR professionals know how busy it can be and how many intricate and moving pieces there are to help ensure you get the process just right. Determining the affordability of your health plans under the Affordable Care Act (ACA) can make this process even more arduous. 

If you’re entering open enrollment season, here’s  information to know about ACA affordability rules. 


How the ACA defines “affordability” 

The simple explanation of the ACA’s definition of affordable coverage is a plan covering the employee that costs 9.5 percent (indexed for inflation, 9.61 percent for 2022) or less of that employee’s household income. However, it’s not actually that simple. 

Applicable Large Employers (ALEs) must either offer affordable coverage that provides “minimum value” to full-time employees or potentially pay the IRS as part of an employer shared responsibility payment. ALEs also have specific IRS reporting responsibilities to prove that they’re offering affordable health care options to benefits eligible employees. 

The affordability percentage is the standard measure for establishing the affordability of employer-sponsored health coverage. In August 2021, the IRS decreased the affordability percentage index from 9.83 percent to 9.61 percent for plan years beginning in calendar year 2022. 

If an employee’s required contribution for self-only coverage does not exceed 9.61 percent of the employee’s total household income, the coverage can be considered affordable. 

The affordability percentage is adjusted each year and it is incumbent on employers to know the current rate, otherwise they can face affordability issues. The affordability rate for 2023 has been announced. Check our blog post, Employers Possibly At Risk for Penalties as IRS Decreases ACA Affordability Percentage for 2023 for details. In particular, employers who are currently charging employees the maximum allowable amount while maintaining affordability status will need to take the new 2023 affordability percentage into consideration when establishing their cost sharing for the upcoming plan year. When the affordability percentage decreases from year to year, an employee’s cost share will also need to decrease, which is uncommon and unfavorable given the steady increase in overall premiums passed on to employers each year.  While it is expected that the affordability percentage will increase for 2023, it’s important for employers to stay aware. 


Potential penalties

The section 4980H(b) penalty applies when an ALE offers minimum essential coverage to 95 percent or more of their full-time employees, but does not offer to a benefits eligible employee, coverage that is considered “affordable” or providing  “minimum value.” When a full-time employee declines the offer of coverage and utilizes the ACA marketplace to enroll in subsidized coverage, the ALE will receive a 226-J penalty notice from the IRS. In 2022, the 4980H(b) penalty is $343.33 per month per FTE receiving subsidized ACA marketplace coverage. 


How to help correctly determine affordability 

As an employer, you typically aren’t aware of each employee’s total household income. So, how can you best determine if your offer of health coverage meets affordability guidelines? 

The IRS grants the use of three affordability safe harbors

  • Form W-2 wages

  • Rate of pay

  • Federal poverty line (FPL)

According to the IRS, “An ALE may choose to use one safe harbor for all of its employees or to use different safe harbors for employees in different categories, provided that the categories used are reasonable and the employer uses one safe harbor on a uniform and consistent basis for all employees in a particular category.” 

While W-2 and rate of pay options are based on employee income, the federal poverty level changes every year. 


Considerations when using federal poverty line 

Since the Department of Health and Human Services doesn’t release the current year FPL until January each year, employers with a January 1st plan year who use FPL as a safe harbor must utilize the prior year’s FPL along with the upcoming year’s affordability percentage when determining their plan cost sharing. For example, if your organization’s plan begins January 1, 2023, during open enrollment planning in the fall of 2022, you must use the 2022 FPL since the 2023 amount has not been declared yet. 

The final regulations state that employers may choose to use any of the poverty guidelines in effect within six months before the first day of the plan year of the applicable large employer member's health plan. Practically speaking, employers with plan years that begin before August 1st will have the option to choose the current or prior year’s federal poverty line, as it’s often not feasible to determine what cost sharing is going to look like in the short period of time between the announcement of the newest FPL and the start of your plan year. Plan years between August 1st and December 31st are required to use the current year FPL. 


Prepare for the “family glitch” 

The affordability determinations mentioned above are based on self-only coverage. However, covering premiums for family members is traditionally more expensive than it is for self-only coverage. Employees obtaining health insurance for spouses, dependents and other family members may not qualify for a premium subsidy from the ACA exchange resulting in much higher rates paid for health care. This disparity is referred to as the “family glitch.”

If the proposed rule passes, it is expected that beginning in 2023, premiums for coverage that is also offered to dependents will need to meet the affordability calculation, or those dependents will now qualify to receive financial assistance in the form of marketplace premium subsidies. There is no indication at this time that employers will face a penalty for failure to offer affordable coverage to families. 

Employers going into open enrollment in the second half of 2022 should know that this rule may become law in 2023, and employers may face additional reporting requirements related to the cost of the various tiers of plans that are offered. 


Next steps

Determining affordability of your health plans as determined by the ACA can be a challenge every year, especially when you’re trying to navigate the complexities on your own. 

Refer to general guidance on ACA affordability rules in order to help plan ahead as much as possible. You can also contact Equifax Workforce Solutions at any time. We’re happy to help answer your questions and connect you with the products or services that best fit your needs. 


The information provided is intended as general guidance and is not intended to convey any tax, benefits, or legal advice. For information pertaining to your company and its specific facts and needs, please consult your own tax advisor or legal counsel. Links to sources may be to third party sites. We have no control over and assume no responsibility for the content, privacy policies or practices of any third party sites or services.