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This week the IRS issued Revenue Procedure 2022-34, which significantly decreases the affordability threshold for ACA employer mandate purposes to 9.12% for plan years beginning in 2023. The new 9.12% level marks by far the lowest affordability percentage to date, as well as the first time the threshold has dropped below the initial 9.5% standard set by the ACA.

The affordability percentage decrease is based on the ACA’s index inflation metric, which is the rate of premium growth for the preceding year over the rate of CPI growth for the preceding year. The affordability percentages apply for plan years beginning in the listed year. A calendar plan year will therefore have the 9.12% affordability threshold for the plan year beginning January 1, 2023.

The ACA employer mandate rules apply to employers that are “Applicable Large Employers,” or “ALEs.” In general, an employer is an ALE if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year.

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:

  1. not offered minimum essential coverage,
  2. offered unaffordable coverage, or
  3. offered coverage that did not provide minimum value.

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:

  1. the coverage does not provide minimum value or is not affordable (more below); and
  2. the full-time employee declines the offer of coverage and instead enrolls in subsidized coverage on the Exchange.

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.

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