The Affordable Care Act’s (ACAs) employer mandate defines applicable large employers (ALEs) as companies with 50 or more full-time equivalent (FTE) employees. ALEs must offer minimum essential coverage (MEC) to at least 95% of their FTEs and ensure coverage is affordable.
To help ALEs accomplish this, the federal government created “safe harbors” designed to calculate the affordability of their health plans, including individual coverage HRAs (ICHRAs).
Since employers can’t know their employees’ household incomes, these safe harbors can be used to determine affordability and help avoid ACA penalties. But just how is ACA affordability calculated?
In this post, we’ll review how affordability is determined and discuss the different types of safe harbors available to ALEs.
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What are the types of safe harbors?
Employers that offer unaffordable coverage to their full-time employees, or offer coverage that doesn’t meet minimum value requirements, can be subject to an ACA penalty and fine. For employers looking to avoid this penalty, safe harbor selection and qualification is very important.
The following safe harbors will help you determine affordability of your contribution and set you up for success in preparation for tax season.
What are the affordability requirements?
Employers must offer affordable healthcare coverage to their full-time employees to satisfy the Section 4980H(b) safe harbor. According to ICHRA regulations, for contributions to be considered affordable, the cost of health insurance for an employee can’t be more than 9.61% of the employee’s household income in 2022. This is a slight decrease from 2021’s threshold of 9.83%.
Reducing the affordability requirement from last year means if your health plan was considered affordable in 2021, it might not be in 2022. Be sure to run an ACA affordability test with the following safe harbor options to be sure you’re meeting the new requirements for 2022.
Household income safe harbors
Under these regulations, there are three ACA affordability safe harbors regarding household income. Employers can substitute an employee’s household income amount with the amounts calculated using these options.
Keep in mind that safe harbor protections only apply to plans that provide at least MEC and minimum value.
Employers can use these safe harbors to prove ACA affordability when submitting their annual IRS return:
- The employee’s W-2 wages: This a good option for employers whose employees regularly work the same number of hours each week or are salaried and have a consistent annual income.
- The employees rate of pay: Employers can use this method for hourly and salaried employees. However, this option can expose you to a greater risk of penalties if your employees have varying wage rates.
- The federal poverty line: Although the most conservative option, this safe harbor makes calculating affordability the easiest because employers don’t have to calculate for individual employees.
As an employer, you can use one or more of these safe harbors to ensure the employee contribution is no more than 9.61% of their household income and according to the employee class guidelines.
As you read ahead, you’ll find that you may choose different safe harbors for different employee populations, per ACA guidelines.
Location safe harbor
Part of the affordability calculation depends on the rating area your employee works in. Using the proposed location safe harbor, an employer is able to use an employee’s primary site of employment rather than their home address to determine the applicable rating area.
The primary employment site is the location where the employer reasonably expects the employee to work on the first day of the plan year or the first day they are eligible for coverage.
How to determine other locations to meet the safe harbor requirements:
- If the employee’s location changes for a permanent or indefinite period, the primary employment site is considered changed on the first day of the second month after the employee begins work at the new location.
- For employees who work remotely on a regular basis but may be required to report to an office occasionally, the location they report to is considered the primary employment site.
- If an employee solely works remotely, their residence is the primary employment site.
The location safe harbor is useful because employers can look at the same rating area for all employees working at a single location.
Look-back safe harbor
The look-back safe harbor allows an employer the ability to use the lowest-cost silver plan from a previous calendar year to calculate the affordability for an upcoming plan year.
The look-back safe harbor regulations include the following guidelines:
- For a plan starting on January 1, an employer can use the monthly premium of the lowest-cost silver plan from January of the prior calendar year to help determine affordability.
- For a plan that starts after January 1, an employer can use the monthly premium of the lowest-cost silver plan from January of the current calendar year.
Though the proposed safe harbor allows an employer to use an applicable look-back month to determine premium cost, they must use the employee’s age as of the first day of the plan year, or the first day they are eligible, and their current applicable location.
If an employee’s location changes during the plan year, the employer can still use the look-back month to determine the lowest-cost silver plan, but must use the employee's updated location to get the correct cost.
This safe harbor is beneficial because it gives employers time to determine affordability before the start of their plan year.
While employers aren’t required to use any of these safe harbors, they can be very helpful when determining affordability for your employees and avoiding pesky penalties.
Choosing an IRS safe harbor for proving ACA affordability can be tricky, but employers should know that they don’t need to apply one safe harbor across their entire workforce and should choose what makes the most sense for their organization.
This article was originally published on October 4, 2019. It was last updated December 13, 2021.