On September 6, 2024, the IRS released Revenue Procedure 2024-35, announcing the 2025 indexing adjustment percentage for determining the affordability of employer-sponsored health coverage under the Affordable Care Act (“ACA”). This adjustment, made annually for inflation, sets the affordability threshold at 9.02% of household income for plan years starting on or after January 1, 2025, an increase from the 2024 rate of 8.39%. As a result, many employers may need to adjust employee contributions to comply with the updated ACA requirements.

What Does This Mean for Employers?

For employer-sponsored health coverage to be considered affordable under the ACA in 2025, the employee’s contribution toward the lowest-cost, self-only coverage cannot exceed 9.02% of their household income. Ensuring affordability is crucial for meeting the ACA’s employer shared responsibility provisions under the §4980H employer mandate. Failing to offer affordable, minimum essential coverage (“MEC”) may result in penalties under §4980H(a) or (b), commonly referred to as the “sledgehammer” and “tack hammer” penalties.

Sledgehammer Penalty (§4980H(a)): This penalty applies if an applicable large employer (“ALE”) does not offer MEC to at least 95% of its full-time equivalent employees (“FTEs”). If one FTE obtains subsidized coverage through the Exchange, the penalty is triggered at $241.67 per month, multiplied by all FTEs (minus the first 30).
Tack Hammer Penalty (§4980H(b)): If an employer offers MEC but it is deemed unaffordable, a penalty of $362.50 per month is applied for each FTE who receives subsidized coverage through the Exchange.

ACA Safe Harbors for 2025

Employers can assess affordability using one of three ACA affordability safe harbors: the Federal Poverty Level (“FPL”), Rate of Pay, or Form W-2. These safe harbors help employers meet the affordability requirements under the ACA by evaluating self-only coverage at the lowest-cost option available.

Federal Poverty Level Safe Harbor: For 2025, employers offering a plan that costs employees no more than $113.20 per month for self-only coverage will automatically meet the ACA affordability standard for FTEs working in the contiguous U.S. The threshold increases to $141.38 per month in Alaska and $130.11 in Hawaii.
Rate of Pay Safe Harbor: This method allows employers to set affordability based on the employee’s hourly rate or monthly salary. For hourly employees, the contribution is deemed affordable if it does not exceed 9.02% of the employee’s lowest hourly rate multiplied by 130 hours. For salaried employees, the test uses 9.02% of 1/12 of the employee’s annual salary.
W-2 Safe Harbor: Under this safe harbor, an employer can determine affordability by ensuring the employee’s annual contribution for single coverage is less than or equal to 9.02% of the employee’s Form W-2 Box 1 wages. This calculation takes place after the year ends but can guide employer contributions throughout the year.

Planning for 2025

With the new affordability percentage set for 2025, employers should review their contribution strategies in advance. Work with your benefits team to ensure your health plan offerings remain compliant with the ACA and avoid unnecessary penalties.

If you have questions or need assistance in evaluating your current plan against these new thresholds, our team is here to help you navigate these changes and develop a plan that works for both your organization and your employees.

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