The Internal Revenue Service has issued Revenue Procedure 2024-35 to implement the 2025 index adjustments for certain Affordable Care Act (“ACA”) applicable contribution percentages used to determine affordability under the law’s employer shared responsibility mandate.
Background. Under the ACA, contribution percentages are used to determine: (i) whether an Applicable Large Employer (“ALE”) is subject to the ACA’s employer shared responsibility penalty for failure to provide full-time employees with affordable coverage that has “minimum value”; (ii) whether an individual is exempt from the ACA’s individual mandate penalty (if it reinstated by Congress) due to lack of access to affordable coverage; and (iii) the amount of an eligible taxpayer’s ACA premium tax credit.
NOTE: ALEs are employers that had 50 or more full-time equivalent employees during the preceding calendar year.
The ACA provides that an ALE’s coverage is affordable if the employee’s required contribution for self-only coverage does not exceed a certain percentage of the employee’s “household income” (as determined under IRS guidelines and safe harbors) for the tax year. ALEs that fail to provide affordable coverage are liable for a penalty of $3,000 per year (as indexed for inflation) for each full-time employee who receives a premium tax credit through an ACA Marketplace.
The affordability safe harbors are as follows:
- W-2 safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed the applicable percentage of the employee’s Box 1, W-2 salary for that year, the affordability test is satisfied.
- Rate of pay safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed the applicable percentage of the employee’s monthly wage amount, the affordability test is satisfied.
- Federal poverty line safe harbor. If the employee’s contribution for single coverage under the employer’s lowest cost medical option does not exceed the applicable percentage of the federal poverty line for a single individual, the affordability test is satisfied.
Revenue Procedure. For 2025, the required contribution percentage for ALEs has increased to 9.02% (up from 8.39% for 2024). This means that if an employee’s share of the premium for employer-provided coverage for 2025 is more than 9.02% of his or her “household income,” the coverage is not considered affordable for that employee and the ALE may be liable for a penalty if that employee obtains a premium tax credit through an ACA Marketplace.
Revenue Procedure 2024-35 is available at https://www.irs.gov/pub/irs-drop/rp-24-35.pdf