Health coverage affordability is an important part of complying with the ACA’s Employer Mandate. Failing to comply can result in penalties and fines. So, how do employers determine affordability?
There are three affordability safe harbors that can be used: Form W-2, Federal Poverty Line (FPL), and Rate of Pay.
ACA Employer Mandate
The ACA Employer Mandate requires Applicable Large Employers (ALEs) to offer affordable, comprehensive health coverage to their full-time employees. If they do not comply, then they may face penalties. The mandate is also known as the employer shared responsibility provision (ESRP).
For ACA purposes, an ALE or ALE Member is generally an employer with 50 or more full-time or full-time equivalent employees in the previous year.
An employee is considered full-time under the Affordable Care Act if they work 130 hours a month, the minimum number of hours to be considered full-time.
ACA Affordability Requirements
Coverage is considered affordable if the employee contributions for self-only coverage does not exceed 9.5% (adjusted annually) of the employee’s household income. For tax year 2022, this is 9.61%.
What are Affordability Safe Harbors?
This is a technique used to prove the affordability of the health coverage offered. As stated above, coverage is considered affordable if the contributions do not exceed a certain percentage of their household income. Employers typically don’t know their employee’s household income, though. This is where the federal safe harbors come into play.
Employers can use the federal safe harbors to determine if the employee contributions can be considered affordable. Using the federal safe harbors is not required, but it can help shield the employer from potential ESRP penalties.
Types of Affordability Safe Harbors
Since household income can be difficult to determine, due to factors such as spousal or secondary income, the IRS offers three affordability safe harbors to assist in determining affordability:
- Form W-2 Safe Harbor — This is based on the wages reported in Box 1 of their Form W-2.
- Federal Poverty Level (FPL) Safe Harbor — This is based upon the FPL. The employee contributions cannot exceed 9.5% (adjusted annually) of the Individual FPL divided by 12.
- Rate of Pay Safe Harbor — This is based on the rate of pay at the beginning of the coverage period.
Employers may use one or more of these affordability safe harbors, only if they offered at least 95% of their full-time employees and their dependents the opportunity to enroll in coverage that provides minimum value.
Employers may choose to use only one affordability safe harbors for all employees or they may use different safe harbors for different categories of employees. The categories must be reasonable and use of the safe harbor must be uniform and consistent for all employees in their particular categories.
Determining which affordability safe harbors to use will come in handy when preparing 1095-C forms, specifically Line 16. When choosing a safe harbor, it is important to understand how each one works.
Form W-2 Safe Harbor
This safe harbor uses the employee’s wages reported in Box 1 on Form W-2.
To determine affordability, the employer should multiply the affordability percentage (9.61%) by the Box 1 amount. If the annual employee cost for the least expensive, self-only coverage is equal to or less than this amount, then it can be considered affordable using this safe harbor.
This method uses the current year wages to determine affordability, so the employer may not know if the plan is affordable until it’s time to file taxes. This is a huge disadvantage of this safe harbor method. Due to this, it’s best used by employers whose employees have a consistent income.
Federal Poverty Line Safe Harbor
This safe harbor uses the annual individual mainland FPL to determine affordability. The FPL is set by the Department of Health and Human Services each January. However, employers may use the FPL from six months before the plan year began.
To determine affordability, multiply the FPL by the affordability percentage (9.61%). If the annual employee cost for the least expensive, self-only coverage is equal to or less than this amount, then it can be considered affordable using this safe harbor.
Calculating affordability with this safe harbor is easier than with the other options since it uses the FPL and doesn’t rely on individual employee wages.
Rate of Pay Safe Harbor
This safe harbor uses the employee’s rate of pay and can be used for hourly or salaried workers. The IRS does not accept this for employees in which tips or commissions comprise most of their remuneration.
- For hourly workers, the employer should assume that the employee was full time, or worked 130 hours per month. To determine affordability, the employer should find the employee’s monthly wages (hourly wage * 130) and multiply it by the affordability percentage (9.61%).
- For salaried workers, affordability is calculated by multiplying an employee’s salary (on the first day of the coverage period) by the affordability percentage.
If the monthly employee cost for self-only coverage is equal to or less than this amount, then it can be considered affordable using this safe harbor.
If an employer has a wide variety of wage rates, then they should use the lowest hourly rate to determine the affordability.
Reporting Using Affordability Safe Harbors
If an employer uses any of the federal affordability safe harbors, then they must report it in their Form 1095-C filing. Each safe harbor has its own code, which are designated by the IRS and can be found in the Form 1095-C instructions.
The codes are as follows:
- 2F – Form W-2 safe harbor
- 2G – Federal Poverty Line (FPL)safe harbor
- 2H – Rate of Pay safe harbor
These are reported on each Form 1095-C in Part II, Line 16. See example form below:
Affordability is an important part of ACA compliance. Using one of the federal affordability safe harbors helps to protect employers and their businesses from potential liability, fines, and penalties.
BoomTax, The Boom Post, and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors prior to engaging in any transaction.