For the first time in four years, the IRS adjusted the affordability percentage used for the shared responsibility penalties. The IRS recently announced that the affordability percentage for 2025 will be 9.02%. This is up from 8.39% in 2024. For employers this means that if you set your employee premium costs from last year right at the affordability threshold, you may be able to increase premiums to your employees and still be affordable in 2025.
If you are a large employer required to provide health plan coverage to avoid the employer mandate shared responsibility penalties, it is prudent to reevaluate your health plan contribution structure each year before open enrollment to ensure that your plan is still “affordable.” Since the passage of the Affordable Care Act (ACA), it is no longer a strategy to set it and forget it with your premiums. Most employers were diligent about calculating affordability in the first few years that the shared responsibility penalties were in effect, but we have seen some start to get lax on continuing to do it each year. Over the past few years, we have seen an increased focus on ACA compliance from the IRS and expect to continue to see a steady stream of penalty notifications. A failure to consider whether your plan is affordable when passing through any premium increases could result in an unintended penalty for each employee who enrolls in exchange coverage and qualifies for financial assistance.
In order to be considered to have offered an affordable plan, an applicable large employer must have at least one health plan option where the employee’s share of single coverage is less than the affordability percentage multiplied by the employee’s household income. The IRS adjusts the affordability percentage each year and for 2025 the cost of single coverage must be less than 9.02% of an employee’s household income in order to be affordable. This 9.02% is the same percentage that employers need to use when relying on the federal poverty level, rate of pay, or W-2 affordability safe harbor. The 9.02% is up from the 2024 percentage. Because this percentage went up this year, employers may be able to pass along more of the premium (or premium increase) and still be affordable next year. For example, if using the rate of pay safe harbor, premiums for an employee making $20/hour were affordable in 2024 if they were less than $218.14. In 2025, for that same employee, the premium will be affordable if it is less than $234.52. With the cost of health insurance on the rise, being able to pass even a little more of the cost through is incredibly helpful to some employers.
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