The Affordable Care Act (ACA) includes provisions that require certain employers to offer health coverage to their employees. A key aspect of these provisions is the concept of “affordable” coverage. For employers navigating the complexities of the ACA, particularly when it comes to part-time employees, understanding how affordability is determined is crucial. This article breaks down the rules around ACA affordability, focusing on how it impacts your part-time workforce.
Under the ACA, employer-provided coverage is deemed affordable if the employee’s required contribution for the least expensive, minimum-value plan offered by the employer is no more than 9.5 percent of that employee’s household income. This percentage is adjusted annually. The “employee required contribution” encompasses all payments made by the employee towards coverage, including salary reductions and any pre-tax contributions. It also considers the effects of employer arrangements like Health Reimbursement Arrangements (HRAs), wellness incentives, and opt-out payments that can affect the employee’s net cost.
However, employers, especially Applicable Large Employers (ALEs), typically don’t have access to information about their employees’ household incomes. To address this, the IRS provides three “affordability safe harbors” that employers can use to determine if their coverage offers are considered affordable. These safe harbors rely on data that employers readily have, such as W-2 wages or rates of pay. If an employer’s coverage meets the affordability threshold under any of these safe harbors, it is considered affordable under the employer shared responsibility provisions of the ACA, regardless of whether it would be considered affordable based on the employee’s actual household income for premium tax credit purposes.
The three main affordability safe harbors are:
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Form W-2 Wages Safe Harbor: This safe harbor generally bases affordability on the amount reported in Box 1 (Wages, tips, other compensation) of the employee’s Form W-2. If the employee’s contribution for the lowest-cost, minimum value coverage is 9.5% or less of their Form W-2 wages, the coverage is considered affordable under this safe harbor.
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Rate of Pay Safe Harbor: This safe harbor uses the employee’s rate of pay at the start of the coverage period to determine affordability. For hourly employees, adjustments are permitted if the hourly rate decreases, but not if it increases. This provides a simpler way to assess affordability based on hourly or salaried pay rates.
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Federal Poverty Line Safe Harbor: This safe harbor benchmarks affordability against the federal poverty line. Coverage is considered affordable if the employee’s monthly contribution does not exceed 9.5 percent of the federal poverty line for a single individual, divided by 12. This safe harbor offers another straightforward benchmark for employers.
Employers have the flexibility to use one or more of these safe harbors. They can even apply different safe harbors to different categories of employees, as long as the categories are reasonable and the chosen safe harbor is applied consistently within each category. It’s important to note that to utilize any of these safe harbors, an ALE must offer at least 95 percent of its full-time employees (and their dependents) the opportunity to enroll in health coverage that provides minimum value for self-only coverage. When an employer offers multiple health coverage options, the affordability test is always applied to the lowest-cost self-only coverage option that provides minimum value and is available to the employee.
For a deeper dive into the specifics of affordability calculations, including how HRAs, wellness incentives, flex credits, and opt-out payments factor in, employers can refer to IRS Notice 2015-87 and proposed regulations on the premium tax credit. These resources offer detailed guidance on navigating the complexities of ACA affordability and ensuring compliance.
In conclusion, understanding the concept of “affordable coverage” under the Affordable Care Act is vital for employers, especially when managing health benefits for part-time employees. By utilizing the provided safe harbors and understanding the rules around employee contributions, employers can confidently navigate ACA compliance and ensure they are offering affordable health coverage to their workforce.
