Employer Guide & Glossary
AFFORDABILITY SAFE HARBORS
APPLICABLE LARGE EMPLOYERS [ALEs] are not required to use the same SAFE HARBOR method or all FULL-TIME EMPLOYEES. Different methods may be used for different business classifications as specified in the ACA regulations. But within each classification these SAFE HARBOR methods must be applied consistently.
ALEs CANNOT apply different methods on an employee-by-employee basis.
Below is a guide to those different SAFE HARBOR methods.
W-2 METHOD:
This SAFE HARBOR uses an employee's W-2 BOX 1 gross income. It generally maximizes the employee’s contribution.
- WORKS WELL: for a workforce whose earnings can be predicted with some certainty, allowing contributions to be structured as a percentage of weekly earnings.
- ON THE DOWN SIDE: this method can only be calculated after the close of the calendar year, since based on the employee’s W-2.
RATE OF PAY METHOD:
This method calculates affordability on a monthly basis, using the employee’s hourly rate of pay on the first day of the plan year.
- WORKS WELL: for employers with a significant number of hourly employees.
- ON THE DOWN SIDE: this method can’t be used for tipped and commission employees; and the Rate of Pay calculation is limited to 130 hours of service/month.
FEDERAL POVERTY LEVEL (FPL):
This is the simplest method but requires the highest employer contribution of the three SAFE HARBORS.
For ACA TY24, the following 2023 FPL guidelines are to be used:
| 1 ............................................................ | $14,580 |
| 2 ............................................................ | $19,720 |
| 3 ............................................................ | $24,860 |
| 4 ............................................................ | $30,000 |
| 5 ............................................................ | $35,140 |
| 6 ............................................................ | $40,280 |
| 7 ............................................................ | $45,420 |
| 8 ............................................................ | $50,560 |
For families/households with more than 8 persons, add $5,140 for each additional person. Somewhat higher guidelines are established for Alaska and Hawaii.
- NOTE: MEDICAL OPT-OUT & WELLNESS PROGRAM INCENTIVES. These programs may impact affordability calculations and need to be properly structured to manage this impact.
- NOTE: IRS 4980H[b] PENALTIES. An ALE’s potential penalty exposure for unaffordable coverage lies with eligible employees who waive coverage. The ACA penalty for unaffordable coverage is not automatic. The IRS 4980H[b] PENALTY is triggered only when an employee who has waived the unaffordable coverage on offer enrolls in a HEALTH INSURANCE MARKETPLACE [also called EXCHANGES] to purchase coverage and benefit from a FEDERAL PREMIUM TAX CREDIT [FPTC], lowering their monthly payments. Employees enrolled even in unaffordable coverage [FORM 1095-C LINE 16, CODE 2C] do not trigger the 4980H[B] PENALTY, because they would not be enrolled in a HEALTH INSURANCE MARKETPLACE with FPTC assistance.
If you have questions regarding AFFORDABILITY calculations and SAFE HARBORS or any other aspect of ACA reporting & compliance for employers, please contact BENEFITSCAPE, the leading ACA specialist. BENEFITSCAPE provides best-in-class ACA services and intelligent FLAG & FIX REGTECH DIAGNOSTICS to 1000s of employers of all sizes, in all sectors, and on all major HCMs/ACA modules.