Is health coverage “affordable”? 

Is health coverage affordable? Depends on who you ask.

When I use a word,’ Humpty Dumpty said in rather a scornful tone, ‘it means just what I choose it to mean—neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master—that’s all.’

—Lewis Carroll, Through the Looking Glass, Alice in Wonderland, Chapter VI: Humpty Dumpty

Is health coverage affordable? Depends on who you ask. And as Humpty Dumpty would say, “which is to be master.” When it comes to employer compliance, the IRS is the master when it comes to defining “affordable.” 

I quote Humpty in light of the recent Internal Revenue Service update to its definition of “affordable” for employee contributions for health coverage in 2024 – see Revenue Procedure 2023-29.  The IRS lowered the affordability percentage from 9.12% to 8.39%. To avoid the employer mandate penalty taxes, an “applicable large employer” must offer at least one coverage option that is “affordable”, “minimum essential coverage”, of “minimum value.” (An Applicable Large Employer in 2024 is an employer who had 50 or more Full Time Equivalent employees on business days during 2023.)  

More on compliance with this requirement below, after we figure out what the IRS means when it uses the word “affordable.”   

Health reform “affordability”

According to the tax code, health coverage affordability is determined as a percentage of the household’s modified adjusted gross income (MAGI). The IRS recognizes that employers don’t know the employee’s household MAGI. In fact, most employees don’t know their own MAGI. 

So, the IRS offers “safe harbors” based on the employee’s income with each employer. 

The percentage for 2024 is 8.39%, a seemingly significant decrease from 9.12% in 2023. One of the safe harbor calculations is based on the federal poverty level, where employee contributions for single coverage meet “affordability” if less than $101.93 per month – calculated (for the lower 48 states, Hawaii and Alaska are higher) as: $14,580 (federal poverty level) x 0.0839 = $1,223.26 / 12 = $101.93. 

Note: Because the federal poverty level increased substantially from 2022 to 2023 (from $13,590 to $14,580 in the lower 48 states), the $101.93 limit is only $1.35/month less than the $103.28 limit for 2023! The IRS offers two other safe harbor calculations (e.g., rate of pay, Form W-2).   

Keep in mind that an ALE need only offer qualifying coverage to “full-time” employees and any eligible children up to age 26 (coverage need not be offered to a spouse). The offer of “affordable”, “minimum essential coverage” of “minimum value” is enough to avoid the penalties – employees need not actually enroll. The employer mandate penalties are:

A catch:  Under a cafeteria plan, flex credits or opt out credits that employees can elect to take as taxable compensation will reduce the affordability safe harbor. To avoid triggering penalty taxes: 

Is compliance difficult?

It need not be. Not much to worry about — few employers will need to (or want to) adjust employee contributions for their current coverage — except for those who are already at the 2023 limit. 

Remember that the dollar limit described above only applies to employee-only coverage. 

The Biden Administration “solved” what it called the family glitch by changing the rules so that employer sponsored plans with higher family contributions do not disqualify family members from taxpayer subsidized coverage in the public exchange. 

That is, some employers may increase the employee’s contribution to cover a child or a spouse to make coverage “unaffordable” (per the Family Glitch) so that those individuals might consider “opting out” and give them access, give them a choice, if they want it, to enroll in less-costly, taxpayer subsidized coverage through the public exchange.   

With respect to the employee only contribution, 8.39% of pay is already much more than what most employees contribute. For someone making $25,000 a year, 8.39% is approximately $175/month or $2,100/year. For comparison, the average employee contribution was $1,401/year or $116.75/month for all plans in 2023. The median is likely substantially less.  

Most importantly, an employer need only offer one option that is “affordable, minimum essential coverage of minimum value” to avoid the penalty tax. 

Improving engagement with appreciation

A few plan sponsors have taken action to highlight the value of their coverage by contrasting the options they currently offer with what health reform sets as the minimum – what qualifies as “affordable”, “minimum essential coverage” of “minimum value”. 

You can adopt a coverage option that meets the minimums that avoids the penalty taxes, that no one will select, and that demonstrates why your plan offers value significantly greater than what health reform requires. 

Consider the coverage here as a behavioral economics “anchor”, an option to offer alongside what you currently offer.  

Option Name: Health Reform

Eligible: Employee and eligible children up to age 26 (not the spouse)

Minimum Essential Coverage: Preventive services plus ordinary clinical trial expenses.

Minimum Value (2023): 

In-network and out-of-network cost sharing do not cross-apply.

Employee contribution: 

Everyone would find such coverage inadequate – with those contributions, after tax, using a $9,100/$18,200 in-network deductible.  

You don’t have to actually offer that option if you aren’t concerned about meeting the affordability requirements and avoiding employer penalty taxes. You may find it sufficient just to show your coverage, side by side, against the health reform minimums – to confirm the generosity of your coverage.  

Employees will be able to easily recognize the value of the coverage that you provide, and how it far exceeds what Health Reform requires. 

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