What ALEs Need to Know About Benefits in 2025
The 2025 open enrollment season is coming up fast, and employers need to decide how to keep health plans affordable for their employees.
The IRS has made important changes this year, so it’s critical for Applicable Large Employers (ALEs) to stay updated and adjust their plans as needed. This guide explains what ALEs should focus on in 2025.
The 2025 Affordability Threshold
In 2025, the affordability threshold will increase from 8.39% to 9.02% of an employee’s household income. This means that for health coverage to be considered affordable under the ACA, the employee contribution for self-only coverage cannot exceed 9.02% of their household income.
While this is an increase, it still has important implications for how employers manage their health plan offerings and set employee contribution levels.
Why the 2025 Affordability Threshold Matters
More Employees May Be Eligible for Subsidies
With the threshold rising to 9.02%, more employees might find that their employer-sponsored coverage is considered unaffordable, making them eligible for subsidies through the Health Insurance Marketplace (Exchange).
Potential Employer Penalties
Employers with unaffordable plans may face penalties under the ACA’s Employer Shared Responsibility provisions. The penalties are based on whether employees purchase subsidized coverage through the Exchange. Employers need to ensure their contributions are aligned with the updated threshold to avoid these penalties.
Necessary Adjustments for Employee Contributions
Safe Harbor Adjustment
For ALEs using the safe harbor method to determine employee contributions, adjustments should be made for the lowest-cost, self-only plan based on the updated affordability threshold of 9.02% in 2025. The IRS offers this safe harbor to help employers determine whether they are offering affordable coverage.
Employers need to calculate the maximum allowable contribution so that it does not exceed 9.02% of the employee’s household income. If these contributions are not properly adjusted, employers risk incurring penalties.
Non-Calendar Year Plans
For organizations that operate on a non-calendar-year plan, it’s advisable to wait for the U.S. Department of Health and Human Services (HHS) to publish the 2025 Federal Poverty Guidelines before finalizing employee contribution amounts. This ensures compliance with the most current federal guidelines.
Leveraging the Rate of Pay Safe Harbor for Pacific Northwest Employers: Higher Minimum Wages Provide Opportunities
Employers in states like Washington and Oregon, where minimum wages are higher than the federal minimum wage, can take advantage of the Rate of Pay safe harbor method. This allows employers in these regions to potentially offer more generous contributions while staying within the affordability threshold.
For example, in Portland, Oregon, the minimum wage is expected to rise to $16.00 per hour in 2025. Under the Rate of Pay method, the maximum allowable employee contribution for self-only coverage would be $230.43 per month. This is higher than the $109.65 allowed under the Federal Poverty Line (FPL) method, offering flexibility to employers who wish to provide more comprehensive benefits.
Key Actions for Employers in 2025
Review Safe Harbor Options
Employers should begin by reviewing the three safe harbor methods (W-2 wages, Rate of Pay, and Federal Poverty Line) to determine which method works best for their employee population and compensation structure.
Calculate Employee Contributions
Employers should calculate the maximum allowable employee contributions for the lowest-cost, self-only plan, ensuring they do not exceed the new threshold of 9.02%. Accuracy in these calculations is crucial to ensure compliance.
Consider Regional Variations
In areas like the Pacific Northwest, where minimum wages are higher than the federal minimum, employers may have an opportunity to offer more generous contributions without breaching the affordability threshold.
Monitor Federal Poverty Guidelines
Employers using the FPL safe harbor method should wait for the publication of the 2025 Federal Poverty Guidelines to finalize contribution amounts. This ensures calculations are based on the most accurate and up-to-date federal data.
Understanding the ACA Employer Shared Responsibility Payments: Part A and Part B Penalties
Employers need to understand the penalties for failing to comply with the ACA’s Employer Shared Responsibility provisions:
- Part A Penalty: This applies when an ALE does not offer minimum essential coverage to nearly all full-time employees, and at least one employee buys coverage through the Exchange and receives a premium subsidy. The penalty is $255 per month for each full-time employee (excluding the first 30 employees) in 2025.
- Part B Penalty: This applies when an ALE offers coverage that is not affordable. If at least one employee purchases coverage through the Exchange and receives a subsidy, the employer will face a penalty of $380 per month for each employee receiving the subsidy in 2025.
Staying Compliant in 2025
To stay compliant with the ACA in 2025, employers must ensure that their health plans meet the updated affordability threshold of 9.02%. By taking the following steps, employers can avoid penalties and continue to provide affordable health coverage to their employees:
- Review the three safe harbor options for setting employee contributions.
- Carefully calculate employee contributions to ensure they do not exceed 9.02% of household income.
- Stay informed about the latest Federal Poverty Guidelines and regional wage variations.
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