How is ACA affordability calculated?
The Affordable Care Act (ACA) requires employers with more than 50 full-time equivalent (FTE) employees to provide health insurance to their employees. This is known as the “employer mandate." Employers that don’t provide affordable insurance are subject to steep penalties.
Per IRS notice 2018-88 and IRS Notice rp-19-29 An ICHRA is affordable if the remaining amount an employee has to pay for a self-only silver plan on the exchange is less than the affordability percentage (determined by the IRS each year) of the employee’s household income.
Large employers that are subject to the corporate mandate to provide insurance (typically employers with over 50 lives) can design their HRA to satisfy the mandate and avoid any penalties. The catch is the HRA must be designed to be “affordable”. We’ll talk about what that means in the Affordability Section.
Similarly, employees purchasing their own insurance from the individual marketplace will want to know if they can accept premium tax credits to help pay for their coverage. If an HRA is considered “affordable”, then they are not eligible for tax credits/ However, if an ICHRA is “unaffordable” then employees can choose between tax credits or the ICHRA.
There are instances where small employers (under 50 employees) that are not subject to the mandate may want to purposefully design an “unaffordable” ICHRA so that their employees can receive tax credits.
It is important to note that prior year plan rates can be used to determine affordability – i.e. 2022 plan year rates can be used to determine 2023 affordability.