This is the seventh article in our Compliance 101 blog series where we use six questions to break down important compliance topics. Below you will learn more about the Affordable Care Act (ACA) Affordability Safe Harbors. Read more below!
Who needs to worry about affordability safe harbors?
Definition: ALE as defined in section 4980H(c)(2) of the Internal Revenue Code, enacted by the Affordable Care Act (ACA), with respect to a calendar year is an employer that employed an average of at least 50 full-time employees on business days during the preceding calendar year.
- All applicable large employers (ALEs), including nonprofit, and government employers must offer minimum value (MV), affordable coverage to its full-time employees (defined as, for a calendar month, an employee employed on average at least 30 hours of service per week, or 130 hours of service per month) to avoid a penalty, also known as an employer shared responsibility payment.
- Non-ALEs are not subject to the employer shared responsibility regulations.
What is the purpose of an affordability safe harbor?
- ALEs when determining whether coverage is affordable for purposes of the ACA’s provisions, are not likely to know the household income of their employees, so the IRS provides three safe harbors: Form W-2 wages, an employee’s rate of pay, or the federal poverty line (FPL)* that an employer may use instead of household income in making the affordability determination.
*FPL is also commonly referred to as the federal poverty level safe harbor. However, in the final IRS regulations and IRS Q&A 39 on employer shared responsibility provisions the safe harbor is referred to as the federal poverty line safe harbor.
Where is the affordability safe harbor used?
- Under the ACA, ALEs are required to report, typically using IRS Forms 1094C/1095-C, whether they did or did not offer minimal value, affordable coverage to each full-time employee (and dependents) for one or more months during the calendar year.
- For a full-time employee who was offered minimal value, affordable coverage but declined, an employer on Form 1095-C, Part II, Line 16, will report to the IRS the reason, (i.e. how affordability was determined) why it should not be subject to an employer shared responsibility penalty with respect to the employee on whom it’s reporting using the applicable safe harbor code for each calendar month.
Why does it matter if an ALE offers affordable coverage?
- Under the ACA, an employee is not eligible for subsidized Marketplace/exchange coverage for any month in which the employee is offered health coverage under an eligible employer-sponsored plan that provides MV and that is affordable relative to the employee’s household income.
- If an employer offers MV coverage to at least 95% of its full-time employees in any given calendar month but that coverage is not affordable under one of the safe harbors and a full-time employee is approved for a premium tax credit for Marketplace/ exchange coverage, the employer may be subject to an employer shared responsibility payment, IRC §4980H(b)—The “B Penalty”.
IRC §4980H(b)—The “B” Penalty. This is also referred to as the “tack hammer” penalty. Full-time employees who were offered but declines employer coverage that does not provide minimum value or is not affordable will trigger the “B” penalty. The monthly penalty assessed on an ALE for each full-time employee who receives a subsidy will be 1/12 of $3,860 (in 2020) for any applicable month.
When is coverage considered affordable for the purposes of the employer shared responsibility provisions?
- Employer-provided coverage is considered affordable for an employee if the employee’s required premiums for the lowest cost self-only ACA compliant coverage does not exceed 9.5% (as adjusted for inflation) of that employee’s household income. e.g.
How are the safe harbors calculated?
Affordability safe harbors are used to determine whether the employer may be subject to an ACA shared responsibility penalty. It is possible for the employer’s coverage to be considered affordable under one of the three safe harbors (and therefore not liable for an ACA penalty) but unaffordable relative to the employee’s household income and the employee is still eligible for a marketplace/exchange subsidy.
- An ALE may choose to use one safe harbor for all of its employees or to use different safe harbors for employees in different categories, provided that the categories used are reasonable and the employer uses one safe harbor on a uniform and consistent basis for all employees in a particular category. The final regulations clarify that reasonable categories generally include specified job categories, nature of compensation (for example, salaried or hourly), geographic location, and similar bona fide business criteria.
- If an ALE offers multiple health care coverage options, the affordability test for a particular employee applies to the lowest-cost self-only coverage option that provides minimum value and that is available to that employee.
Form W-2 Wages Safe Harbor
- Generally requires an employer to look at each employee’s wages at the end of the calendar year as reported on that employee’s Form W-2 in Box 1.
- Coverage is affordable if the employee’s required premiums for the lowest cost self-only ACA compliant coverage does not exceed 9.5% (indexed) of that employee’s W-2 wages (as reported in Box 1)
- This requires a retrospective analysis and an employer may not know if they passed until it’s too late.
- A risky safe harbor to use, especially with an employee population whose schedules and income fluctuate.
Rate of Pay Safe Harbor
- Provides employers with a method for satisfying affordability prospectively without having to analyze each employee's wages and hours.
- Avoids the retrospective analysis required under the Form W-2 wages safe harbor and allows an employer to assume 130 hours/mo with some limitations (more below).
- A beneficial safe harbor to use for employees whose work hours fluctuate.
- Hourly employees
- Generally based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, if the rate of pay is decreased (but not if the rate of pay is increased).
- Coverage is affordable for a calendar month if the employee’s required premiums for the lowest cost self-only ACA compliant coverage does not exceed 9.5 percent (as adjusted) of an amount equal to 130 hours multiplied by the lower of the employee's hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee's lowest hourly rate of pay during the calendar month.
- If an hourly employee's hourly rate of pay is reduced during the year, the rate of pay is applied separately to each calendar month, rather than to the entire year and the employee's required contribution may be treated as affordable if it is affordable based on the lowest rate of pay for the calendar month multiplied by 130 hours.
- The affordability calculation is not altered by a leave of absence or reduction in hours worked.
- Example: If a full-time hourly employee earns $10 per hour in a calendar month (and earned at least $10 per hour as of the first day of the coverage period) but has one or more calendar months in which the employee has a significant amount of unpaid leave or otherwise reduced hours, the employer may still require an employee contribution of up to 9.78% (in 2020) of $10 multiplied by 130 hours ($127.14).
- Non-hourly employees
- Coverage to a non-hourly employee is treated as affordable for a calendar month if the employee’s required premiums for the lowest cost self-only ACA compliant coverage contribution for the calendar month does not exceed 9.5% (as adjusted) of the employee's monthly salary, as of the first day of the coverage period (instead of 130 multiplied by the hourly rate of pay).
- If the monthly salary is reduced, including due to a reduction in work hours, the rate of pay safe harbor is not available.
- Tipped employees or commission only
- The rate of pay safe harbor cannot be used, as a practical matter, for tipped employees or for employees who are compensated solely on the basis of commissions. Employers can use the two other affordability safe harbors, Form W-2 wages and federal poverty line, for determining affordability for employees whose compensation is not based on rate of pay.
- Federal Poverty Line Safe Harbor
- Intended to provide employers a predetermined maximum amount of employee contribution that in all cases will result in the coverage being deemed affordable.
- Only one calculation is required.
- Coverage is treated as affordable, if the employee's required monthly contribution for the lowest cost self-only ACA compliant coverage, does not exceed the federal poverty level for a single individual. (Calculated as 9.5 percent (as adjusted) of the most recently published poverty guidelines in effect within 6 months before the start of the plan year, divided by 12.)
NOTE: No guidance has been released that changes any of the affordability analyses for purposes of COVID-19. For instance, for purposes of the W-2 safe harbor, the amount in Box 1 could be significantly less if employee hours were reduced or they were furloughed or transitioned to some type of unpaid status. Employers should ensure they are in compliance with the ACA employer mandate to avoid penalties.
If you have additional questions on the content in this blog, please reach out to your Alera advisor or email us at firstname.lastname@example.org to be connected with a compliance expert in your area.
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Disclaimer: This blog was written by Michelle Turner, MBA, CEBS, Compliance Consultant, Alera Group Central Region. This blog post intends to provide general information regarding the status of, and/or potential concerns related to, current employer HR & benefits issues. This blog should not be construed as, nor is it intended to provide, legal advice. The opinions expressed herein are based upon the author’s experience as a Compliance Consultant and may not reflect the opinions of your counsel.
The information contained herein should be understood to be general insurance brokerage information only and does not constitute advice for any particular situation or fact pattern and cannot be relied upon as such. Statements concerning financial, regulatory or legal matters are based on general observations as an insurance broker and may not be relied upon as financial, regulatory or legal advice. This document is owned by Alera Group, Inc., and its contents may not be reproduced, in whole or in part, without the written permission of Alera Group, Inc.
This article was last reviewed and up to date as of 09/22/2020.