Understanding ACA affordability safe harbor options

Understanding ACA affordability safe harbor options

As mandated by the Affordable Care Act (ACA), applicable large employers (ALEs) must offer healthcare that meets minimum essential coverage (MEC) requirements to 95 percent of their full-time and full-time equivalent employees their dependents.

This requirement also indicates your employees’ required contribution for self-only coverage must be no more than 9.61 percent of their household income (this percentage is adjusted for each plan 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 9.61 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 2022 affordability threshold of 9.61 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 for plan years beginning on or after July 11, 2022, use the 2022 FPL and affordability threshold (i.e., 9.61% of $13,590 FPL for $108.83 per month). For plan years beginning between January 1, 2021 through July 10, 2021, see the example below for your FPL safe harbor calculation.

Calculating affordability using FPL

For coverage to be considered affordable under the FPL safe harbor, an eligible employee must not be required to pay more than $103.15 for plan years beginning January 1, 2022-July 10, 2022, or $108.83 per month for plan years beginning July 11, 2021-December 31, 2022, for self-only 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 that using the FPL safe harbor may not always be a cost-effective solution in comparison to using rate-of-pay. Read on for more about why.

Rate-of-pay safe harbor
The rate of pay safe harbor uses an employee’s hourly rate of pay or monthly salary to establish affordability. For groups of employees who benefit from regular overtime pay, rate of pay safe harbor may not be the most beneficial option for the employer. For salaried employees, premiums may be considered affordable if not more than 9.61 percent of their monthly salary (based on their rate of pay at coverage period start), provided they have had no reductions in pay below their pay at the beginning of their coverage period. For hourly employees, premiums may be no more than 9.61 percent of the monthly rate of pay (calculated using the lower of hourly rate of pay for the month and the hourly rate of pay at the beginning of the coverage period multiplied by 130 hours).

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 .0961 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 be offered at least one MEC plan that costs ≤ $162.41 for employer-sponsored self-only qualified health plan offer each month, regardless of whether or not the employee works 130 hours each month.

Note that in the rate-of-pay example for this specific employee, the employer would be able to charge employees $59.26 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 uses information from the employee’s W-2 to determine affordability. In this case, the coverage is considered affordable if premiums are not more than 9.61 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 9.61 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 $3,075.20 annually for healthcare, or $256.27 per month for coverage.

For the W-2 safe harbor to apply, coverage must be affordable for each month 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 can 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 you determine and apply the optimal safe harbor for different employee segments.

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

This information is intended as general information; not as any legal, tax or financial advice.