2025 ACA Affordability Percentage Update: What Employers Need to Know

If you’re an employer navigating the Affordable Care Act (ACA) regulations, there’s an important update for 2025 that could impact your health plan offerings. The IRS has announced the new affordability percentage for employer-sponsored health plans, and it’s a slight increase from 2024. But what does this really mean for your business and your employees?

Let’s break it down so you can stay compliant and avoid any potential penalties.

What Is the ACA Affordability Percentage?

The ACA affordability percentage is a key metric for Applicable Large Employers (ALEs)—typically companies with 50 or more full-time employees or equivalents (FTEs). Under the ACA, ALEs are required to offer health insurance to their full-time employees, and that insurance must be deemed “affordable.” If it’s not, employers could face penalties.

So, how do you know if your health plan is affordable? The IRS sets a threshold each year that determines the maximum amount an employee can be charged for health insurance premiums. For 2025, that threshold is 9.02% of an employee’s household income, which is an increase from 8.39% in 2024.

In simpler terms, if your employees are paying more than 9.02% of their household income for their health insurance premium, the coverage is considered unaffordable under ACA rules. This could trigger penalties for your business.

How Does This Affect Applicable Large Employers (ALEs)?

If your business qualifies as an ALE, you need to pay attention to this affordability percentage. If your health plan offerings are deemed unaffordable by the IRS, you may face penalties under the employer mandate of the ACA. So, ensuring that your health plans meet the affordability threshold is crucial for staying compliant and avoiding hefty fines.

Safe Harbors: Simplifying the Calculation

One of the challenges of meeting the ACA affordability requirement is figuring out what 9.02% of household income actually means. Most employers don’t have access to their employees’ household income details. Luckily, the ACA provides some “safe harbor” methods to help employers calculate affordability without having to pry into personal financial information.

There are three safe harbor methods to choose from:

W-2 Safe Harbor: This method uses an employee’s prior year’s W-2 wages (Box 1). Essentially, you ensure that the employee’s health insurance premium doesn’t exceed 9.02% of their total W-2 wages from the previous year.
Rate of Pay Safe Harbor: This method bases the affordability calculation on an employee’s hourly rate or monthly salary. For example, for an hourly worker, you can multiply their hourly wage by 130 (the standard full-time work hours for a month), and then calculate 9.02% of that amount.
Federal Poverty Line (FPL) Safe Harbor: If you choose this option, you calculate affordability based on the federal poverty line for a single individual. For 2025, you’ll use the federal poverty guidelines from 2024 to determine the maximum premium you can charge an employee while still meeting the affordability threshold.

Employers must choose one safe harbor method and apply it uniformly across all eligible employees to remain compliant.

How the Federal Poverty Line Safe Harbor Works in Practice

Let’s say you decide to use the Federal Poverty Line (FPL) safe harbor to calculate affordability for 2025. For this method, you’ll base your calculation on the 2024 federal poverty guidelines. These guidelines are updated annually and represent the minimum income needed for a single individual to cover basic living expenses.

Using the FPL safe harbor ensures that the health plan premium for single coverage doesn’t exceed 9.02% of the 2024 federal poverty line. Even if the employee elects to add dependent coverage, the affordability calculation only applies to single coverage.

This method is often the simplest for employers to implement because it removes the need to look at individual employee wages or income details, making it a straightforward way to stay within the ACA guidelines.

What This Means for Your Employees

The increase in the affordability percentage from 8.39% in 2024 to 9.02% in 2025 means that employers may be able to raise the employee portion of the health insurance premium without pushing the plan into the “unaffordable” category. For some employers, this could mean greater flexibility in structuring your health plan contributions.

However, it’s important to remember that while this change might allow for slightly higher employee contributions, it’s still crucial to consider the impact on your workforce. Offering affordable health coverage is not just about avoiding penalties; it’s also about maintaining a satisfied and healthy workforce. High premiums could lead to employees opting out of coverage, which could affect employee satisfaction and retention.

ACA Penalty Updates for 2025

The Affordable Care Act (ACA) requires Applicable Large Employers (ALEs) to offer healthcare coverage to full-time employees. There are two potential penalties employers could face if they don’t meet these requirements:

1. The A Penalty (Sledgehammer Penalty)

This penalty applies when an ALE fails to offer healthcare coverage to at least 95% of its full-time employees (and their children up to age 26). If even one employee without coverage buys subsidized insurance through the ACA marketplace, the employer faces a penalty.

2025 Penalty Amount: $241.67 per month ($2,900 annually) for each full-time employee (minus the first 30 employees).
Trigger: The penalty applies when a full-time employee who wasn’t offered coverage gets subsidized coverage through the Exchange.

Important Note: The A Penalty only cares about whether enough employees were offered coverage—it doesn’t look at whether the coverage was affordable or met minimum value standards.

2. The B Penalty (Tack Hammer Penalty)

The B Penalty comes into play if an employer avoids the A Penalty but either:

Didn’t offer coverage to a specific employee,
Offered coverage that wasn’t affordable, or
Offered coverage that didn’t provide minimum value.
2025 Penalty Amount: $362.50 per month ($4,350 annually) for each full-time employee who buys subsidized coverage on the Exchange.

This penalty is only triggered by full-time employees who are offered unaffordable or inadequate coverage and who go on to purchase subsidized insurance through the ACA Exchange.

Why Affordability Matters

If an ALE offers healthcare coverage but it isn’t “affordable” by ACA standards, they could face the B Penalty—$362.50 per month for each employee who buys subsidized coverage elsewhere.

Planning for 2025

As an employer, you should start reviewing your health plan offerings now to ensure they align with the 2025 affordability percentage. Here are a few steps to help you prepare:

Review Your Current Premium Contributions: Compare the percentage of employee income that goes toward health insurance premiums to the 9.02% threshold.
Choose a Safe Harbor Method: Decide whether the W-2, rate of pay, or federal poverty line safe harbor is the best fit for your business.
Communicate with Employees: Let your employees know about any changes to their health plan contributions for 2025. Transparency helps in maintaining trust and clarity around their benefits.
Work with Your Benefits Team or Consultant: Ensuring that your health plan remains affordable might require some adjustments. Consult with your benefits team or a consultant to see if you need to make any changes to stay compliant with ACA rules.

Final Thoughts

The 2025 update to the ACA affordability percentage is a key consideration for any Applicable Large Employer. Staying compliant with the ACA’s affordability requirements isn’t just about avoiding penalties; it’s about creating a health plan that supports your employees while balancing the financial realities of your business.

Take the time to review your health plan contributions and safe harbor options to make sure you’re ready for the year ahead. With the right planning, you can ensure your health plan remains affordable and meets the needs of your employees.

Still Have Questions?

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