Health Plan Increase

Your Health Plan Cost Increased, But What you Can Charge to be Affordable Decreased

Many employers this time of year are finding out that they are going to be receiving a premium increase for their health plans.  As someone who sits on our firm’s health care committee, I can attest that sometimes that increase can feel like a gut punch when you receive it. Once employers negotiate it or shop their plan to get that final rate, the next step is to determine how much of the increase, if any, to pass on to employees. Given our current inflationary environment, this decision on what your company can afford versus what your employees can afford may be even more difficult this year.

On top of the inflationary pressures, the IRS is making it slightly more difficult for large employers.  For the second year in a row, the affordability percentage was decreased by the IRS in Rev. Proc. 2022-34. As a reminder, in order to be considered to have offered an affordable plan, a large employer must have at least one health plan option where the employee’s share of single coverage is less than the affordability percentage multiplied by the employee’s household income.  In 2021, an employer was deemed to offer affordable coverage if single coverage in the lowest cost plan offered by the employer did not exceed 9.83% of the employee’s household income. For 2022, that percentage was decreased to 9.61%.  For 2023, the IRS has decreased the percentage even more to 9.12%. This 9.12% is the same percentage that employers need to use when relying on the federal poverty level, rate of pay, or W-2 affordability safe harbor.

This decrease means that even if you do not increase your premiums at all this year, what was affordable last year may be unaffordable this year due to a reduction in the affordability percentage.   For example, if using the rate of pay safe harbor, premiums for an employee making $15/hour were affordable in 2022 if they were less than $187.39.  In 2023, the premium is only affordable for the same individual if the premium is less than $177.84.  If you are a large employer required to provide health plan coverage to avoid the employer mandate shared responsibility penalties, it is imperative to stop and reevaluate your health plan contribution structure this year before open enrollment to ensure that your plan is still “affordable.” A failure to consider whether your plan is affordable when passing through any premium increases could result in an unintended penalty for each employee who enrolls in exchange coverage and qualifies for financial assistance.

If you need assistance in determining whether your plan is affordable or which safe harbor would be best, please contact any member of the Graydon employee benefits team.