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Assessing the ACA-defined affordability of employer-sponsored health plans

  • Blog, Employee Benefit Plans / 401(k)

As the year winds down, many employers have wrapped up open enrollment and are preparing to administer their 2025 benefits packages. When it comes to health insurance, one thing your organization should always keep an eye on is compliance with the Affordable Care Act (ACA).

Namely, if your organization is considered an applicable large employer (ALE) under the ACA, you must offer employees a plan that’s considered “affordable” as so defined under the law. Let’s look at the ground rules and the inflation-adjusted determinant amounts for next year.

Ground rules

An employer’s size, for ACA purposes, is determined in any given year by the number of its employees in the previous year. Generally, if your organization has an average of 50 or more full-time or full-time equivalent employees during the previous year, you’ll be considered an ALE for the current calendar year. A full-time employee is an individual who provides, on average, at least 30 hours of service per week.

Under the ACA’s employer shared responsibility provision, ALEs must offer minimum essential coverage that’s affordable and provides minimum value to full-time employees (or equivalents) and their dependents. Affordability is determined by an annually indexed required contribution percentage. An ALE may be penalized if at least one of its full-time employees receives a premium tax credit for buying individual coverage through a Health Insurance Marketplace (commonly referred to as an “exchange”) and it fails the affordability test.

2025 changes

For plan years beginning in 2025, the required contribution percentage used to determine whether employer-sponsored health coverage is affordable has been inflation-adjusted from the 9.5% baseline to 9.02%. This is a slight increase from the 2024 amount of 8.39%.

Bear in mind that the premium tax credit mentioned above underwent some important changes following the enactment of the Inflation Reduction Act in 2022. Specifically, the law extended through 2025 the favorable premium tax credit rules adopted under the American Rescue Plan Act (ARPA).

The ACA limits the premium tax credit to taxpayers with household incomes between 100% and 400% of the federal poverty line who buy insurance through a Health Insurance Marketplace. However, the ARPA eliminated the upper-income limit for eligibility. It also increased the amount of the premium tax credit by decreasing, across all income bands, the percentage of household income that eligible individuals must contribute toward the cost of coverage bought from a Health Insurance Marketplace.

The ACA’s employer shared responsibility penalty amounts for ALEs have also been indexed for inflation. The penalty for offering coverage deemed unaffordable or that fails to provide minimum value will be $4,350 per applicable employee in 2025 (down from $4,460 in 2024). In addition, the “no offer” penalty may be triggered if an ALE doesn’t offer coverage to at least 95% of full-time or full-time equivalent employees. It will be $2,900 per applicable employee in 2025 (down from $2,970 in 2024).

Law of the land

The ACA remains the law of the land and an important factor in choosing and administering an employer-sponsored health insurance plan. Contact us for help understanding your organization’s obligations under the law, as well as for assistance in managing all the costs and tax impact associated with your fringe benefits.

© 2024

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