Determining the affordability of the health coverage offered to your full-time employees and their dependents can be a bit complex. To put it simply, provided coverage is considered affordable if the premium constitutes less than 9.78% of the household income of an eligible employee for plans starting in 2020.
The ACA originally set the affordability threshold at 9.5% of an employee’s household income, and the IRS has adjusted it annually.
Since household income can be difficult to determine, due to factors such as spousal or secondary income, the IRS offers three safe harbor options to assist in determining affordability:
- Employee’s W-2 wages — based on the amount of wages paid as reported in Box 1.
- Employee’s rate of pay — based on the rate of pay at the beginning of the coverage period.
- Individual Federal Poverty Level (FPL) — employee monthly contribution does not exceed 9.78% of the federal poverty line for a single individual for the applicable calendar year, divided by 12.
You may use one or more of these safe harbors only if you offer at least 95% of your full-time employees and their dependents the opportunity to enroll in coverage that provides minimum value for the self-only coverage offered to the employee.
You may choose one affordability safe harbor for all employees or 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 in preparation for completing your ACA reporting will come in handy when preparing your 1095-C forms, specifically Line 16.