The Affordable Care Act’s (ACA) employer mandate defines applicable large employers (ALEs) as organizations with 50 or more full-time equivalent (FTE) employees. ALEs must offer minimum essential coverage (MEC) to at least 95% of their full-time employees 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 health reimbursement arrangements (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.
In a rush? Skip ahead to a section below:
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 are very important.
The following safe harbors will help you determine the affordability of your contribution and set you up for success in preparation for tax season.
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 8.39% of the employee’s household income in 2024. This is a decrease from 2023’s threshold of 9.12%.
Reducing the affordability requirement from last year means if your health plan was considered affordable in 2023, it might not be in 2024. Be sure to run an ACA affordability test with the following safe harbor options to be sure you’re meeting the new requirements for 2024.
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:
As an employer, you can use one or more of these safe harbors to ensure the employee contribution is no more than 8.39% 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.
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:
The location safe harbor is useful because employers can look at the same rating area for all employees working at a single location.
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:
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 on December 13, 2021.