ACA Affordability Percentage Calculator 2024 (Rate of Pay Method)
Understanding ACA Affordability Percentage and the Rate of Pay Method
The Affordable Care Act (ACA) mandates that employers offer health coverage to their full-time employees that is considered "affordable" and provides "minimum value." If coverage is not affordable or does not meet minimum value, the employer may be subject to penalties, and employees may be eligible for subsidies (premium tax credits) on the Health Insurance Marketplace.
What is the ACA Affordability Percentage?
The IRS sets an "affordability percentage" each year. For 2024, this percentage is 9.12%. This percentage is applied to a taxpayer's "household income" to determine the maximum amount they should reasonably pay for their employer-sponsored health insurance premium. If their share of the premium exceeds this amount, the coverage is considered unaffordable.
How is Household Income Determined?
For the purpose of the affordability test, household income is generally the taxpayer's modified adjusted gross income (MAGI). For families, it's the MAGI of the taxpayer, their spouse (if filing jointly), and any dependents.
The Rate of Pay Affordability Safe Harbor
Employers can use different methods to determine if their offered coverage is affordable. One of these is the "Rate of Pay" safe harbor. This method allows employers to calculate the affordability based on the employee's hourly wage, monthly salary, or wages paid on a period other than a month. For this safe harbor, employers look at the lowest monthly cost for an employee's share of self-only coverage, based on the employee's rate of pay for the first full pay period of the coverage month.
Formula for Rate of Pay Safe Harbor (Simplified):
(Employee's Hourly Wage * 130 hours) / 12 * IRS Affordability Percentage
This calculator uses a simplified approach by asking for the *annual* household income and the *monthly* premium. While the employer uses the "rate of pay" for their internal calculation to determine affordability for penalty purposes, this calculator helps an individual understand affordability based on their total expected household income and the cost of their health insurance premium. The IRS affordability percentage (9.12% for 2024) is the key figure that links household income to the maximum acceptable premium.
Why is this Important?
If your employer-sponsored health insurance premium costs more than 9.12% of your household income, you may qualify for a premium tax credit on the Health Insurance Marketplace. This calculator provides an estimate to help you understand your potential eligibility.
Example:
Let's consider a single individual:
- Household Income (Annual): $55,000
- Monthly Health Insurance Premium (Employee's Share): $450
- Federal Poverty Level (FPL) for Household Size (e.g., 1 person): $15,060 (for 2024 – note: FPL is often used as a benchmark for subsidies, but the affordability test uses MAGI directly)
- IRS Affordability Percentage (2024): 9.12% (0.0912)
Calculation:
Maximum Affordable Monthly Premium = Household Income / 12 * Affordability Percentage
Maximum Affordable Monthly Premium = $55,000 / 12 * 0.0912
Maximum Affordable Monthly Premium ≈ $418.00
Result: Since the employee's monthly premium ($450) is higher than the maximum affordable premium ($418.00), this coverage would be considered unaffordable based on their household income. This individual may be eligible for a premium tax credit on the Health Insurance Marketplace.