Recently, the 2024 federal poverty level (FPL) was announced as $15,060 (up from $14,580 in 2023). Importantly, the annual FPL will impact Affordable Care Act (ACA) affordability calculations when using the FPL safe harbor to determine affordability, as described further below.
As a reminder, the ACA requires applicable large employers (ALEs) – that is, employers with 50 or more full-time and full-time equivalent employees, on average, in the prior calendar year – to offer affordable minimum value coverage to their full-time employees and dependents, or face a potential penalty. For plan years starting in 2024, ALEs must offer at least one plan that costs employees less than 8.39% of their household income (described in our prior blog, 2024 ACA Affordability Decreases Significantly to 8.39%). Because employees’ household income is generally unknown by employers, ALEs can utilize one of the three safe harbors to determine whether they meet the 2024 affordability requirement: Federal Poverty Level (FPL), W-2, and Rate of Pay.
For more on the affordability safe harbors, see the IRS Q&A on Affordability.
Under the FPL safe harbor, coverage will be affordable if the cost to employees for self-only coverage on the lowest-cost plan offered is less than 8.39% of the federal poverty level (which is determined annually). The FPL safe harbor amount is calculated based on the following formula:
Monthly Safe Harbor Amount = [8.39% x Federal Poverty Level (FPL)] / 12
Importantly, employers are permitted to use the federal poverty guidelines in effect six months prior to the beginning of the plan year to calculate affordability under the FPL safe harbor. This is because the annual federal poverty amount is generally not released until after the calendar year begins, so calendar year plans generally rely on the prior year’s federal poverty level. This flexibility provides employers with adequate time to establish premium amounts in advance of a calendar year plan’s open enrollment period.
As a result, the FPL safe harbor is calculated differently for calendar year plans than for non-calendar year plans:
While the 2023 FPL can be used to determine the FPL safe harbor for plan years that begin before July 1, 2024, the 2024 FPL must be used for plans that begin on or after July 1, 2024.
Note that Rate of Pay and W-2 safe harbors are calculated the same regardless of plan year start.
With the flexibility to use the FPL in place six months prior to the start of the plan year, the FPL safe harbor amount will depend on plan year start, as described above. As such, ALE employers who rely on the FPL safe harbor to meet the ACA affordability requirements should keep this in mind when developing their contribution strategy.
Note for Sequoia One Clients: The Sequoia One plan year begins on July 1, 2024; therefore, Sequoia One clients who are ALEs can comply with the ACA affordability requirements under the FPL safe harbor by offering at least one plan that costs less than $105.29 ($131.51 for Alaska, and $121.02 for Hawaii) for self-only coverage. ACA affordability will be discussed with clients when setting contribution strategy.
Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2024 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved
Diane Cross — Diane is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Diane enjoys spending time with her family, live music, and cycling.
