Perhaps one of the more complex pieces of the ACA compliance equation is the affordability safe harbor provisions.
At its simplest, coverage is considered affordable if the premium constitutes less than 9.8% of the household income of an eligible employee. Since this calculation takes into account the take home pay for spouses, it is often difficult (if not impossible) for a large employer to make this calculation, so the IRS has provided 3 alternative calculations that they refer to as affordability safe harbors.
Affordability Safe Harbors
The three affordability safe harbors are (1) the Form W-2 wages safe harbor, (2) the rate of pay safe harbor, and (3) the federal poverty line safe harbor. These are all optional. An employer may use one or more of them only if the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that provides minimum value for the self-only coverage offered to the employee.
An employer may choose to use one or more of the them for all of its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost self-only option available to the employee that also meets the minimum value requirement.
The Form W-2 wages safe harbor generally is based on the amount of wages paid to the employee that are reported in Box 1 of that employee’s Form W-2. The rate of pay safe harbor generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased). The federal poverty line safe harbor generally treats coverage as affordable if the employee contribution for the year does not exceed 9.8% of the federal poverty line for a single individual for the applicable calendar year.
By determining which affordability section 4980h safe harbor to use in advance, you’ll be fully prepared to enter your Forms 1095-C (Line 16 specifically).
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If you’d like to learn more about ACA reporting, keep reading here:
- ACA Draft Instructions Released
- Prepare Employees for 1095-C Form
- ACA Reporting Deadlines
- ACA Deadline Extension
- New Updates for Non-Calendar Year Plans
- IRS Releases AIR Production Shutdown/Cutover Schedule
- BoomTax API: A RESTful API for the IRS AIR System
- Secure Your Account with Our SecureWipe Service
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- Looking for an ACA filing solution?
- Free ACA E-filing Service for Small Businesses
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.