The Affordable Care Act (ACA) mandates that applicable large employers (ALEs) offer affordable health coverage to their full-time employees. Determining what constitutes “affordable” can be complex, especially when considering the diverse workforce that includes part-time workers. For employer-provided coverage to be deemed affordable under the ACA, the employee’s required contribution for the least expensive, minimum-value plan must not exceed 9.5 percent of their household income, as adjusted annually.
However, employers, especially ALEs, often lack visibility into their employees’ household incomes. To address this, the IRS provides three affordability safe harbors that employers can utilize to ensure compliance without needing to know each employee’s household income. These safe harbors are based on data readily available to the employer, such as W-2 wages or rate of pay. If an employer’s health plan offering meets the affordability criteria under any of these safe harbors, it is considered affordable under the employer shared responsibility provisions of the ACA, regardless of whether it meets the household income-based affordability test used for premium tax credits.
The three key affordability safe harbors available to employers are:
-
Form W-2 Wages Safe Harbor: This safe harbor generally uses the employee’s wages reported in Box 1 of Form W-2 as the baseline for affordability calculation. This method simplifies affordability determination by using a familiar and readily available figure.
-
Rate of Pay Safe Harbor: This safe harbor uses the employee’s rate of pay at the start of the coverage period to assess affordability. It’s particularly useful for hourly employees. While adjustments are permitted if the pay rate decreases, employers cannot adjust upwards for pay increases, providing a stable benchmark for affordability assessment.
-
Federal Poverty Line Safe Harbor: This safe harbor benchmarks affordability against the federal poverty line. Coverage is considered affordable if the employee’s required monthly contribution is no more than 9.5 percent of the federal poverty line for a single individual, divided by 12. This safe harbor offers a nationally recognized standard for affordability.
Employers have the flexibility to use one or more of these safe harbors. They can choose to apply a single safe harbor across their entire workforce or use different safe harbors for different categories of employees, provided these categories are reasonable and the chosen safe harbor is applied uniformly and consistently within each category. This flexibility allows employers to tailor their approach to best suit their administrative capabilities and workforce structure, which is particularly beneficial when managing benefits for both full-time and part-time workers who may fall under ACA’s full-time employee definition based on hours worked.
It’s important to note that if an employer offers multiple health coverage options, the affordability test is always based on the lowest-cost self-only coverage option that provides minimum value and is available to the employee. This ensures that affordability is assessed against the most economical qualifying coverage available.
For a deeper dive into the intricacies of affordability, including how elements like Health Reimbursement Arrangements (HRAs), wellness incentives, flex credits, and opt-out payments affect affordability calculations, employers and interested parties can refer to IRS Notice 2015-87 and the proposed regulation on the premium tax credit. These resources provide detailed guidance and examples to navigate the complexities of ACA affordability requirements and safe harbor applications.
