What Is Considered Unaffordable Health Insurance?

Understanding what qualifies as “unaffordable” health insurance is crucial, especially within the framework of the Affordable Care Act (ACA). This federal law establishes specific criteria to determine when health coverage is too expensive, dictating eligibility for financial assistance or potential penalties. These definitions shape how individuals access health plans and how employers structure benefits.

Affordability for Individuals

Health insurance affordability for individuals is primarily assessed in the context of eligibility for Premium Tax Credits (PTCs) through the Health Insurance Marketplace. These tax credits are government subsidies designed to help lower the monthly cost of health insurance premiums. To qualify, the lowest-cost benchmark plan available on the Marketplace, specifically the second-lowest cost Silver plan, must exceed a certain percentage of a household’s income.

For the 2025 plan year, if the premium for this benchmark plan would cost an individual more than 8.5% of their household income, they may be eligible for a Premium Tax Credit. The income used for this calculation is Modified Adjusted Gross Income (MAGI), which includes most taxable income and certain untaxed foreign income, tax-exempt interest, and non-taxable Social Security benefits.

The Premium Tax Credit amount is determined on a sliding scale, meaning those with lower incomes receive a larger credit to help cover their insurance expenses. Individuals must meet specific income criteria, generally having household income between 100% and 400% of the Federal Poverty Level (FPL), though new rules allow some with higher incomes to qualify if their premiums exceed the 8.5% threshold. Eligibility also requires that individuals are not eligible for other public coverage programs like Medicaid or Medicare, and do not have access to affordable, minimum value employer-sponsored coverage.

Affordability for Employers

The Affordable Care Act’s employer shared responsibility provisions, often called the employer mandate, define what constitutes affordable health coverage for employers. Applicable Large Employers (ALEs), organizations with 50 or more full-time equivalent employees, must offer affordable, minimum value coverage to their full-time employees. Failure to do so can result in penalties if employees instead receive Premium Tax Credits on the Marketplace.

For plan years beginning in 2025, employer-sponsored coverage is considered affordable if the employee’s required contribution for the lowest-cost self-only coverage does not exceed 9.02% of the employee’s household income. This percentage applies specifically to the employee’s share of the premium for individual coverage, not family coverage. Employers often do not know an employee’s actual household income, so the IRS provides three safe harbors to help determine affordability.

The IRS provides three safe harbors for employers to determine affordability using readily available information. The Form W-2 wages safe harbor permits basing affordability on wages reported in Box 1 of an employee’s W-2. The rate of pay safe harbor uses an employee’s hourly rate multiplied by 130 hours per month or their monthly salary to project income. The federal poverty line (FPL) safe harbor allows employers to consider coverage affordable if the employee’s contribution for self-only coverage does not exceed a certain percentage of the FPL for a single individual, which translates to a maximum monthly employee contribution of $113.20 for 2025.

The Family Glitch Explained

Historically, the “family glitch” impacted families seeking affordable health insurance. This problem arose because employer-sponsored health coverage affordability was determined solely based on the cost of self-only coverage for the employee. If the employee’s individual coverage was deemed affordable under ACA rules, the entire family was prevented from receiving Premium Tax Credits on the Health Insurance Marketplace.

Even if the cost to add family members to the employer’s plan was prohibitively expensive, those family members were still ineligible for government subsidies. Families were often forced to either pay the high cost of employer-sponsored family coverage or purchase unsubsidized, expensive plans on the individual market. This situation left millions of Americans without access to affordable health coverage options.

The “family glitch” was addressed by new rule changes finalized in October 2022, effective for the 2023 plan year. Under these revised rules, the affordability of employer-sponsored coverage for family members is now determined separately from the employee’s individual coverage. If the cost of family coverage exceeds the affordability threshold (9.02% of household income for 2025), family members may now qualify for Premium Tax Credits to purchase plans on the Marketplace. While the employee might still be ineligible for subsidies if their self-only coverage remains affordable, their dependents can now access financial assistance.

What Unaffordable Coverage Means

When health insurance is deemed “unaffordable,” it triggers specific consequences for individuals and employers. For individuals, if their employer-sponsored health coverage is considered unaffordable or they lack employer coverage, they may become eligible for financial assistance. This assistance comes in the form of Premium Tax Credits, which can significantly reduce the monthly premiums for health plans purchased through the Health Insurance Marketplace.

For employers, particularly Applicable Large Employers (ALEs), failing to offer affordable, minimum value health coverage to at least 95% of their full-time employees can result in penalties. One type of penalty, under Section 4980H of the Internal Revenue Code, applies if the employer does not offer minimum essential coverage to 95% of its full-time employees. This penalty for 2025 is approximately $2,900 per full-time employee, excluding the first 30 employees, and is triggered if just one full-time employee receives a Premium Tax Credit.

A second type of penalty applies even if an employer offers coverage to most employees, but that coverage is not affordable or does not provide minimum value. In this scenario, the penalty for 2025 is approximately $4,350 per full-time employee who obtains a Premium Tax Credit on the Marketplace. These penalties highlight the importance of adhering to the ACA’s affordability standards to ensure compliance and avoid financial repercussions.