Summary Definition: Under the Affordable Care Act, an employer healthcare plan whose lowest-cost option is below a set percentage of household income.
Affordable coverage under the Affordable Care Act (ACA) is a standard for measuring the relative cost of an employer-provided healthcare plan. It’s based on the maximum percentage of household income an employee would have to spend on the least expensive plan.
For 2024, a plan is deemed affordable if its least expensive self-care option is less than 8.39% of a household’s income. Furthermore, employers must demonstrate that their overall company plan would cover a “minimum value” of at least 60% of expected employee medical costs.
Applicable Large Employers (ALEs) who don't meet these standards could be subject to IRS tax penalties that help fund healthcare subsidies.
Passed in 2010, the ACA introduced significant reforms to the healthcare landscape. The law created marketplaces for health insurance, expanded Medicaid eligibility, and prevented insurers from refusing to provide coverage because of pre-existing conditions.
Since employers don’t have access to complete household income (given there may be multiple income sources), the Internal Revenue Service (IRS) provides three affordability safe harbors to serve as proxies. Each has advantages and disadvantages for different types of employers:
Specific rules and regulations related to the ACA may change over time, so you should consult legal or regulatory experts before deciding which method to use.
Read More: What are ACA Safe Harbors?
Along with the affordability threshold, the ACA established a “minimum value” standard for employer-sponsored health plans, ensuring that employers offer comprehensive plans that cover a wide range of services.
This standard requires employer-proved health plans to cover at least 60% of their workforce’s expected medical costs, such as doctor visits, hospital stays, and prescription drugs.
To help employers assess if their plans meet this requirement, the Department of Health and Human Services (HHS) designed a minimum value calculator that asks questions regarding deductibles and copays for various medical services under the plan.
Employers who fail to demonstrate affordability and minimum value under the ACA may be subject to two types of penalties called “employer-shared responsibility payments.” This failure is most readily identified when a full time employees receives a premium tax credit for a healthcare marketplace despite being enrolled in their employer's plan. If this happens, it triggers a 4980(H) penalty, which include the following amounts for 2024:
Learn More: ACA Compliance Guide for Employers
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