Understanding ACA affordability safe harbor options

As mandated by the ACA, eligible employers must offer healthcare that meets minimum essential coverage (MEC) requirements to 95 percent of their full-time employees and their dependents.

The law also indicates your employees’ required contribution must be no more than 9.5 percent of their household income (this is adjusted each year).

However, since employers do not often know their employees’ household incomes, the ACA has created safe harbors that can be used in lieu of household income to determine affordability.

Employers that offer coverage to their full-time employees, that might not be affordable and/or meet minimum value requirements can be subject to what is commonly known as the ACA’s Penalty B. For employers looking to avoid Penalty B, safe harbor selection and qualification are important to manage. To learn more about ACA penalties click here.

The three affordability safe harbors
If affordability safe harbors are a new term for you, here’s how the IRS explains them:

“Employer-provided coverage is considered affordable for an employee if the employee-required contribution is no more than 9.5 percent (as adjusted) of that employee’s household income. In general, the employee required contribution is the employee’s cost of enrolling in the least expensive coverage offered by the employer that provides minimum value. The employee-required contribution includes amounts paid through salary reduction or otherwise and takes into account the effects of employer arrangements such as health reimbursement arrangements (HRAs), wellness incentives, flex credits, and opt-out payments.”

Under this definition, there are three safe harbor options:

  • Federal poverty level
  • Rate of pay
  • Form W-2, Box 1

As an employer, you may use one or more of these safe harbors to ensure the employee-required contribution is no more than the affordability threshold for a given year. You may choose different safe harbors for different employee populations, in accordance with ACA guidelines. Keep in mind that safe harbor protections apply only to plans and offers of coverage that provide at least minimum essential coverage and provide minimum value.  Let’s take a deeper look at each using the 2018 affordability threshold of 9.56 percent.

Federal poverty level (FPL) safe harbor
The FPL safe harbor uses the annual federal poverty line to establish affordability. When calculating affordability using the FPL safe harbor, if premiums are not more than 9.56 percent of the 100 percent FPL rate for the current plan year (i.e., $12,060 for 2018 calendar year plans. Note: there are different FPLs for Alaska and Hawaii), coverage is affordable. See the example below.

Calculating affordability using FPL
For the coverage to be considered affordable under the FPL safe harbor, an eligible employee must not be required to pay more than $96.08 per month for healthcare that meets MEC requirements.

Because the FPL is established each year by the federal government, the FPL safe harbor method does not require any additional data about your employees and their earnings, making affordability easy to calculate. It’s important to consider using FPL as your safe harbor may not always be a cost-effective solution in comparison to using rate of pay. Read on for more on why.

Rate of pay safe harbor
The rate of pay safe harbor uses an employee’s hourly rate of pay to establish affordability. The rate of pay affordability safe harbor is often used by companies with a larger majority of hourly employees. If coverage is deemed affordable for the lowest-paid employee, it will automatically be considered affordable for all other employees.

To use the rate of pay method based on the lowest hourly wage earner, multiply that employee’s hourly wage (rate of pay) during the calendar month or their rate of pay at the start of the calendar year — whichever is lower — by 130 hours. If the premium cost does not exceed 9.56 percent, it is considered affordable.

Calculating affordability using rate of pay
Let’s try an example. If your employee earns $13 per hour, then you simply multiply that rate by 130 for $1,690. Next multiply this figure by .0956 to determine the affordable rate. In this case:
For an offer of coverage to be considered affordable under the rate of pay safe harbor, the employee must not be charged more than $161.56 for employer-sponsored qualified health plan offer each month, regardless of whether or not the employee works 130 hours or not each month.

Note that in the rate of pay example for this specific employee, the employer would be able to charge employees $66 more per month toward their premium in comparison to the FPL safe harbor while still retaining an “affordable offer of coverage”. In this example, employers can benefit from their lower-cost share or use the difference to offset the cost of richer benefits.

Form W-2, Box 1 wages safe harbor
The Form W-2 wages safe harbor utilizes information from the employee’s W-2 to determine affordability. In this case the coverage is considered affordable if premiums are not more than 9.56 percent of an employee’s wage (Box 1 on their W-2 form). Keep in mind that the Box 1 figure is the income reduced by all pre-tax deductions (for example 401k, HSA and benefit contributions.)

To determine this, multiply the employee’s yearly wage as reported in Box 1 of the prior year by 9.56 percent and then multiply the result by the number of months that employee was employed out of the year divided by 12 (total months in a year) as follows:

Calculating affordability using W-2


In this example the employee who has a Box 1 income of $32,000 may not pay more than $3,059 annually for health, or $255 per month for coverage.

For the W-2 safe harbor to apply, coverage must be affordable for all the months the employee is eligible. Because of this, the Form W-2 wages safe harbor is often used by employers whose full-time employees regularly work 30 hours per week or are salaried and retain consistency in hours worked and annual income. Employers are able to use prior year W-2 information to set the rate for January.

The support you need to find your safe harbor
Three very different safe harbor options exist for your company, and if you aren’t sure which is right for your business, Health e(fx) can help.

To learn more about how we can help you solve your safe harbor and affordability questions, contact us today.

December 4, 2018

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