How to Calculate ACA Affordability for 2024
Understand and accurately calculate ACA affordability for 2024. This guide provides the practical steps employers need for compliance.
The Affordable Care Act (ACA) introduced provisions requiring certain employers to offer health coverage that meets specific affordability standards. For businesses, understanding and correctly calculating ACA affordability for 2024 is important to ensure compliance and avoid potential penalties.
Understanding ACA Affordability
“Affordable” refers to the cost of employer-sponsored health coverage for an employee. For plan years beginning in 2024, coverage is considered affordable if the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value does not exceed 8.39% of their household income. This percentage, set by the IRS, has decreased for 2024 from the previous year’s rate.
This calculation applies to Applicable Large Employers (ALEs). An ALE is generally defined as an employer that had an average of at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year. Full-time employees are those who work at least 30 hours per week or 130 hours per month.
The health coverage offered must also constitute “minimum essential coverage” (MEC). MEC includes job-based plans, Marketplace plans, Medicare, and most Medicaid plans. Additionally, the plan must provide “minimum value,” meaning it covers at least 60% of the total allowed cost of benefits for a standard population and includes substantial coverage for inpatient hospital services and physician services.
Gathering Necessary Information for Calculation
Before performing any affordability calculations, employers must collect specific data points. This includes the employee’s required contribution for the lowest-cost, self-only plan that the employer offers which provides minimum essential coverage and minimum value.
Employers also need employee income data to apply the affordability safe harbors. This could include an employee’s W-2 Box 1 wages, their monthly pay rate, or the applicable federal poverty level for 2024 for the FPL safe harbor. The 2024 FPL for a single individual in the contiguous 48 states is $15,060.
Since an employee’s actual household income is unknown to an employer, the IRS provides safe harbors that allow employers to determine affordability using readily available information. These safe harbors provide objective benchmarks for compliance. Employers should ensure they have accurate and up-to-date records for each employee, including their employment status, compensation structure, and enrollment in the offered health plan.
The Affordability Calculation Methods
To demonstrate that offered coverage is affordable, Applicable Large Employers can use one of three safe harbors: the Federal Poverty Line (FPL) Safe Harbor, the W-2 Wage Safe Harbor, or the Rate of Pay Safe Harbor. Employers can choose to apply one or more of these safe harbors for all employees or for reasonable categories of employees, provided the application is uniform and consistent.
The Federal Poverty Line (FPL) Safe Harbor is the simplest method. For a calendar year plan in 2024, coverage is affordable under this safe harbor if the employee’s monthly cost for self-only coverage does not exceed $101.94. This amount is derived by taking 8.39% of the 2023 federal poverty level for a single individual ($14,580) and dividing it by 12 months. For non-calendar year plans, employers may use the FPL from six months prior to the plan year start.
The W-2 Wage Safe Harbor allows affordability to be determined based on an employee’s Box 1 W-2 wages. To use this method, the employee’s required contribution for self-only coverage must not exceed 8.39% of their W-2 Box 1 wages for the year. This calculation is performed after the end of the calendar year and on an employee-by-employee basis. For example, an employee with $60,000 in W-2 wages in 2024 would have affordable coverage if their monthly premium does not exceed $419.50 ($60,000 x 0.0839 / 12).
The Rate of Pay Safe Harbor is particularly useful for employers with hourly or salaried employees. For hourly employees, monthly wages are calculated as their hourly rate multiplied by 130 hours. The employee’s monthly contribution for self-only coverage is affordable if it does not exceed 8.39% of this computed monthly wage. For instance, an hourly employee earning $15 per hour would have affordable coverage if their monthly cost is no more than $163.61 (($15 x 130 hours) x 0.0839).
For salaried employees, the monthly salary as of the first day of the coverage period is used. If a salaried employee earns $4,000 per month, their coverage is affordable if the monthly premium is no more than $335.60 ($4,000 x 0.0839).
Special Considerations for Calculation
Employers may encounter scenarios requiring specific attention when calculating ACA affordability. For new hires, the affordability calculation applies from the date coverage is offered. This involves ensuring that the cost to the new employee meets the affordability threshold based on one of the safe harbors.
Employees with fluctuating hours present a unique challenge. For these variable-hour employees, employers use a look-back measurement period to determine if they average enough hours to be considered full-time. If they do, they are then treated as full-time for a subsequent stability period, during which the affordability calculation must be applied consistently regardless of their actual hours worked.
When an employer offers multiple health plans, the affordability calculation is based on the lowest-cost, self-only option that provides minimum value to the employee, even if an employee chooses a more expensive plan. Consistently apply the chosen safe harbor method across all employees within a reasonable category to maintain compliance.