Updated Federal Poverty Guideline Released

By: HUB’s EB Compliance Team

In January, the Department of Health and Human Services released its 2023 Federal Poverty Guidelines. The federal poverty guidelines, also known as the federal poverty level ("FPL"), measure a household's poverty status based on its annual income. Federal Poverty Guidelines (“FPG”) are a key component in one of three possible affordability safe harbors under the Affordable Care Act’s (“ACA”) employer mandate, and understandably, benefit professionals carefully track these annually updated amounts.

Background Summary

As a reminder, an applicable large employer (“ALE”) is generally required to offer at least one health plan that provides affordable, minimum value coverage to its full-time employees (and minimum value coverage to dependent children), or pay the Employer Shared Responsibility Payment/penalty. For this purpose, “affordable” means the premium for self-only coverage cannot be greater than 9.12% (for plan years beginning in 2023; this percentage is adjusted annually) of the employee’s household income.

Of course, since employers don’t usually know an employee’s household income, the IRS has provided three affordability safe harbors (each with its own corresponding “pros and cons” to consider). This means that if the employer’s plan is “affordable” under any one of the available safe harbors, then it will be treated as affordable for purposes of the employer mandate penalty, even if it is not technically affordable for one or more employees based on total household income. Using a safe harbor to validate affordability under the ACA mandate therefor represents a critical shield against possible mandate penalties. 

New Federal Poverty Guideline

Among the three permitted safe harbor options is the Federal Poverty Guideline safe harbor. Under this rule, if the cost of self-only coverage under an employer’s lowest-cost minimum value plan is no more than 9.12% (for plan years beginning 2023) of the single Federal Poverty Guideline applicable to that individual for that year, then it will be treated as affordable. For 2023, the U.S. mainland’s Federal Poverty Guideline is $14,580 (separate poverty guidelines are used for Hawaii [$16,770] and Alaska [$18,210]). This means that, to satisfy the safe harbor for a mainland employee, the employee’s share of the monthly premium amount cannot exceed $110.80 ($14,580 / 12 X 9.12% = $110.808; note that a plan sponsor should always round down to ensure affordability).

Just because an employer decides to charge a monthly premium that is larger than the amount derived from the FPG does not necessarily mean that the health coverage offer is “unaffordable.” It simply means that the employer cannot use the FPG safe harbor to show that its coverage is affordable. Instead, the employer would use one of the remaining “safe-harbor” options to demonstrate affordability or the coverage would have to be affordable based on the employee’s household income. Typically, those other safe harbors enable the employer to collect larger health coverage contributions from workers. In other words, although the FPG is easiest to use, and always offers a definitive “affordability” threshold, plan sponsors may decide against using it since the FPG generates the lowest employee contribution of the three safe harbors. 

There’s Always Last Year

A key challenge stemming from the Federal Poverty Guideline affordability safe harbor is that it is not released until after January 1. For many plans, that may be long after they have set their contribution rates for the upcoming year. By contrast, the percentage used for affordability (9.12% for plan years beginning in 2023) is usually published in summer of the prior calendar year.

Employers can address this in a couple of ways. Many employers who want to use this safe harbor choose to use the prior year’s poverty guidelines and the current percentage to reach their premiums for a given year. For example, in setting contribution rates for 2023, the employer would use the 2022 Federal Poverty Guideline ($13,590 for the mainland) and the 2023 percentage (9.12%) and come up with a premium of $103.28 ($13,590 / 12 X 9.12% = $103.284, but rounded down to ensure affordability). The regulations expressly allow employers to use the Federal Poverty Guideline in effect six (6) months before the beginning of the plan year. This means employers with plan years beginning January through June may continue using the 2022 Federal Poverty Guideline even though new federal poverty threshold numbers are available.

On the other hand, programs with plan years beginning from July – December fall outside that “six-month prior” range. For such plans, one approach is to use the premium based on the 2022 Federal Poverty Guideline until the 2023 Guideline is released, and then increase the required employee contribution. However, this can create employee relations concerns and administrative difficulty. Employees may have budgeted based on one premium and not be pleased with an increase (even one that, in some years, may appear relatively small). Such a change may also have implications for the employer’s insurance carrier. Finally, an employer may need to evaluate, based on the size of the change in the Federal Poverty Guideline and its workforce composition, whether employees need to be given the opportunity to change their benefit plan elections in accordance with tax rules governing pre-tax elections. We discussed these issues about premium changes in a previous article here.

Takeaway

Although the updated Federal Poverty Guideline brings usefully welcome information, it may be too late for some employers to make changes to their benefit plan contribution levels for 2023. Employers that are subject to the employer mandate and use this safe harbor should keep this information in mind for ACA reporting purposes and in setting rates for 2024.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only, and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.