The IRS released its annual inflation adjustment to the percentage-of-household income used to determine whether an employer offers affordable health care coverage under the Affordable Care Act (ACA). For plan years beginning in 2025, the percentage-of-household income increases to 9.02%. The household income percentage for plans beginning in 2024 was 8.39%. After three years of decreases, this percentage increase gives employers more flexibility in setting employee premiums without making their coverage unaffordable under the safe harbor. 

Background 

Under IRC Section 36B, individuals may qualify for a premium tax credit (PTC) if their employer has not provided affordable coverage that meets the minimum value, meaning the premiums exceed a certain indexed percentage-of-household income. Current regulations define family coverage as affordable if the employee’s self-only coverage is affordable. An Employer Shared Responsibility Payment (ESRP) is triggered when a full-time employee enrolls in coverage through a state or federal health care marketplace and qualifies for premium support in the form of a PTC under IRC Section 36B. 

The ACA’s employer mandate requires applicable large employers to offer minimum essential coverage (MEC) that provides minimum value and is affordable to all of its full-time employees. Affordability is determined as a certain percentage of an employee’s household income. Using the adjusted percentage for 2025, if the required employee premium contribution does not exceed 9.02% of the employee’s household income, then the coverage is affordable under the ACA. 

Safe Harbors 

Since employers may not know an employee’s actual household income, they can rely on three safe harbors to determine affordability, which are based on:  

• The employee’s Form W-2 wages. 

• The employee’s rate of pay. 

• The federal poverty line (FPL). 

If the employee’s required premium contribution is no more than 9.02% of any one of these safe harbors, the contribution will be considered affordable. Employers that set their health insurance premiums based on ACA affordability should consider carefully reviewing their rates with their brokers and/or consultants. For the many plans using the FPL affordability safe harbor, the considerations differ for calendar- and non-calendar-year plans. 

Here to Help 

Partnering with a payroll provider familiar with ACA regulations positions you to proactively manage and simplify your ACA compliance. To learn more on how we help our clients stay compliant, contact us today.