When a Plan Fails Affordability or Minimum Value

Under the Affordable Care Act's employer mandate framework, an applicable large employer (ALE) that offers health coverage can still face substantial federal penalties if that coverage fails two specific quality thresholds: affordability and minimum value. Understanding where these thresholds sit, how failures are triggered, and what consequences follow is essential for any employer navigating ACA compliance obligations.

Definition and Scope

The ACA establishes two independent coverage quality tests that employer-sponsored plans must satisfy to protect an ALE from penalty liability under Internal Revenue Code Section 4980H(b).

Affordability refers to whether an employee's required contribution for self-only coverage does not exceed a specified percentage of household income. For plan years beginning in 2024, the affordability threshold is 9.02% of household income, as adjusted annually by the IRS under Revenue Procedure 2023-29. Because employers rarely know an employee's actual household income, the IRS provides three safe harbors — W-2 wages, rate of pay, and federal poverty line — that substitute proxies for household income. A plan that costs an employee more than the applicable threshold percentage of the relevant proxy fails affordability.

Minimum value refers to whether a plan's actuarial value — the share of total allowed costs the plan pays for a standard population — is at least 60%. The Department of Health and Human Services (HHS) and the IRS jointly define this standard at 26 U.S.C. § 36B(c)(2)(C)(ii). A plan that covers less than 60% of expected costs on an actuarial basis fails minimum value regardless of how affordable the premium is.

Both tests apply at the individual plan level and are evaluated separately. A plan can pass minimum value while failing affordability, and vice versa. Failing either one — or both — exposes an ALE to 4980H(b) penalty liability when at least one full-time employee obtains a subsidized Marketplace plan as a result. The broader framework governing these rules is described across the ACA's principal coverage topics.

How It Works

The penalty mechanism under Section 4980H(b) differs structurally from the 4980H(a) penalty that applies when an ALE offers no coverage at all.

When a plan fails affordability or minimum value, the penalty is assessed on a per-employee basis rather than against the entire full-time workforce. Specifically, the 4980H(b) penalty is triggered only for each full-time employee who:

  1. Was offered coverage that failed affordability or minimum value.
  2. Enrolled in a qualified health plan through the ACA Marketplace.
  3. Received a premium tax credit (PTC) for that Marketplace coverage.

The IRS notifies employers of potential liability through Letter 226-J, which identifies the tax year under review, the employees whose Marketplace subsidies triggered the assessment, and the proposed penalty amount.

The 4980H(b) penalty amount for 2024 is $4,460 per affected employee annually (IRS Rev. Proc. 2023-29), prorated by month. This figure is indexed for inflation each year. Critically, the 4980H(b) amount cannot exceed what the ALE would have owed under 4980H(a) — which caps liability at the number of full-time employees minus 30, multiplied by the applicable 4980H(a) rate. This ceiling prevents a perverse outcome where a marginal coverage failure generates higher penalties than a complete failure to offer coverage.

Common Scenarios

Four patterns account for the majority of affordability and minimum value failures in practice.

Scenario 1 — Employee contribution set too high: An employer offers a plan with an actuarial value of 68% (passing minimum value) but sets the employee's monthly self-only premium at $320. If the employee earns $28,000 per year in W-2 wages, the W-2 safe harbor test produces a threshold of approximately $2,525 annually (9.02% × $28,000). A monthly contribution of $320 equals $3,840 annually — exceeding the threshold and failing affordability.

Scenario 2 — Carve-out plan below 60% actuarial value: An employer designs a fixed-indemnity or limited-benefit supplement and characterizes it as the minimum essential coverage offer. If the plan covers less than 60% of allowed costs on an actuarial basis, it fails minimum value entirely, rendering any affordability analysis irrelevant for 4980H(b) purposes.

Scenario 3 — Spousal or dependent-only coverage priced affordably, self-only priced above threshold: Because affordability is measured solely on the self-only premium — not family-tier premiums — an employer that structures contributions so self-only coverage falls below the threshold is not penalized even if dependent coverage is prohibitively expensive. The inverse, however — affordable family coverage but unaffordable self-only — still constitutes a failure.

Scenario 4 — Mid-year plan amendment reducing actuarial value: An employer mid-year amendment increases deductibles or out-of-pocket limits sufficiently to push actuarial value below 60%. Plans must maintain minimum value for the full plan year; a retroactive amendment that reduces value triggers liability for all months the amended terms apply.

Decision Boundaries

Determining whether a plan has actually failed either standard requires a structured analysis with clear branch points.

Affordability decision tree:

  1. Identify the employee's required monthly self-only contribution.
  2. Select the applicable safe harbor proxy (W-2, rate of pay, or federal poverty line).
  3. Multiply the proxy by the current year's affordability percentage.
  4. If the monthly contribution exceeds 1/12 of that annual product, affordability fails for that month.
  5. Count the months of failure; multiply by the monthly 4980H(b) rate for each employee who received a PTC.

Minimum value decision boundary:

The IRS and HHS provide a Minimum Value Calculator that accepts plan parameters — deductibles, copayments, coinsurance, and out-of-pocket limits — and returns an actuarial value estimate. A result below 60% constitutes a definitive failure. Employers may alternatively obtain certification from an enrolled actuary or use one of the IRS-approved safe harbor plan designs described in IRS Notice 2014-69, which addresses plans that limit inpatient hospitalization benefits as a strategy to manipulate actuarial value calculations.

The two standards also interact with employee eligibility determinations. An offer of coverage that fails both tests for a given month counts as if no qualifying offer was made for that month, which can also affect how Line 14 and Line 16 codes are completed on Form 1095-C. Employers using the affordability safe harbors should document the proxy chosen and retain payroll records supporting the calculation for each plan year, since the IRS's standard look-back period for 4980H assessments aligns with the statute of limitations under IRC § 6501.

References

The law belongs to the people. Georgia v. Public.Resource.Org, 590 U.S. (2020)