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The IRS announced that the affordability percentage for the 2025 calendar year will increase to 9.02% (up from 8.39% which is the rate for the 2024 calendar year).
Under the Affordable Care Act’s employer mandate, an applicable large employer is required to offer at least one health plan that provides affordable, minimum value coverage to its full-time employees (and minimum essential coverage to their dependents) or pay a penalty. For this purpose, “affordable” means the premium for self-only coverage cannot be greater than a specified percentage of the employee’s household income. Based on this recent guidance, that percentage will be 9.02% for the 2025 calendar year.
Employers with non-calendar year plans will still have to use the affordability percentage for 2024 until the start of their 2025 plan year.
Employers need to remember the old “family glitch” was removed starting in 2023. This rule previously prohibited family members of the employee from being eligible for subsidies when the employee was offered affordable, minimum value medical coverage. The removal of the family glitch did not carry new penalty exposure for employers, but it did open the door to subsidy eligibility for family members when the employee’s offer of family coverage is not affordable based on household income. The increase in the affordability percentage for 2025 may lead to some family members who were eligible for subsidies in 2024 no longer being eligible in 2025.
On February 12, 2024, the IRS released Rev. Proc. 2024-14 to provide the adjusted excise tax amounts under the Affordable Care Act’s Employer Shared Responsibility provisions (also known as the ACA Pay or Play Penalty) for 2025.
For background, employers with more than 50 full-time employees (including full-time equivalent employees) are subject to the ACA Pay or Play Penalty under Section 4980H of the Internal Revenue Code (the “Code”). Employers subject to ACA Pay or Play may be liable for a penalty if they do not offer minimum essential coverage to a sufficient number of full-time employees, or if minimum essential coverage is offered to the required number of full-time employees, but that coverage is not affordable.
2025 Adjusted Penalty Amounts
There are two potential ACA employer mandate penalties that can impact ALEs:
a) IRC §4980H(a)—The “A Penalty”
The first is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.
The 2022 A Penalty is $229.17/month ($2,750 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange. Note: The IRS has not yet released the 2023 A Penalty increase.
The “A Penalty” liability is focused on whether the employer offered a major medical plan to a sufficient percentage of full-time employees—not whether that offer was affordable (or provided minimum value).
b) IRC §4980H(b)—The “B Penalty”
The second is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees).
The B Penalty applies for each full-time employee who was:
Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is not multiplied by all full-time employees.
In other words, an ALE who offers minimum essential coverage to a full-time employee will be subject to the B Penalty if:
The 2022 B Penalty is $343.33/month ($4,120 annualized) per full-time employee receiving subsidized coverage on the Exchange. Note: The IRS has not yet released the 2023 B Penalty increase.
In a first-of-its-kind decision, a federal court recently upheld the right of employees to sue their employer for allegedly cutting employee hours to less than 30 hours per week to avoid offering health insurance under the Affordable Care Act (ACA). Specifically, the District Court for the Southern District of New York denied a defense Motion to Dismiss in a case where a group of workers allege that Dave & Buster’s (a national restaurant and entertainment chain) “right-sized” its workforce for the purpose of avoiding healthcare costs.
Although this case is in the very early stages of litigation and is far from being decided, you should monitor this for developments to determine whether you need to take action to deter potential copycat lawsuits.
One of the initial concerns by ACA critics is that many employers would respond to the Employer Mandate by reducing full-time employee hours to avoid the coverage obligation and associated penalties, increasing the number of part-time workers in the national economy. This is because the ACA does not require an employer to offer affordable, minimum-value coverage to employees generally working less than 30 hours per week.
Although the initial economic data analyzing the national workforce suggests that the predictions of wide-scale reduction in employee hours have not materialized, some employers have increased their reliance on part-time employees as an ACA strategy to manage the costs of the Employer Mandate.
Section 510 of ERISA prohibits discrimination and retaliation against plan participants and beneficiaries with respect to their rights to benefits. More specifically, ERISA Section 510 prohibits employers from interfering “with the attainment of any right to which such participant may become entitled under the plan.” Because many employment decisions affect the right to present or future benefits, courts generally require that plaintiffs show specific employer intent to interfere with benefits if they want to successfully assert a cause of action under ERISA Section 510.
The court found that the class of plaintiffs showed sufficient evidence in support of their claim that their participation in the health insurance plan was discontinued because the employer acted with “unlawful purpose” in realigning its workforce to avoid ACA-related costs. In this regard, the employees claimed that the company held meetings during which managers explained that the ACA would cost millions of dollars, and that employee hours were being reduced to avoid that cost.
However, if you are considering reducing your employee hours, you should carefully consider how such reductions are communicated to your workforce. Employers often have varied reasons for reducing employee hours, and many of those reasons have legitimate business purposes. It is vital that any communications made to your employees about such reductions describe the underlying rationale with clarity.