How can employers prove to the IRS that the healthcare plans they provide their employees are affordable under the Affordable Care Act (ACA)? It is a crucial question for employers with 50 or more full-time (FT) and FT equivalent employees who are Applicable Large Employers (ALEs) and must comply with the ACA's Employer Mandate.
ALEs must provide specific health coverage annually under Section 4980H of the Internal Revenue Code (IRC) and submit information returns regarding such health coverage to the IRS under Section 6056 of the IRC. Employers must provide affordable healthcare coverage to their FT employees to comply with Section 4980H(b) of the ACA's Employer Mandate.
3 IRS Affordability Safe Harbors
Here are the three affordability safe harbors you can use to avoid ACA penalties:
1. W-2 Safe Harbor
The W-2 Safe Harbor is a method of proving ACA affordability that contains an employee's W-2 Box 1 gross income's use. To claim W-2 Safe Harbor, W-2 Box 1 Wages are multiplied by 9.83%, with the adjustment for partial annual coverage.
2. FPL Safe Harbor
The FPL Safe Harbor is a procedure of proving ACA affordability to the IRS based on an employee's annual household income. The Department of Health and Human Services (HHS) publishes the annual FPL every year. The mainland FPL for a household size of one is $12,880 for the 2021 tax year. To calculate the FPL Safe Harbor:
- First, take the FPL for a household size of one
- Multiply it by 9.83%
- Then divide the product by 12
If the employee contribution for self-only coverage is below or meets the calculated amount, then offered coverage is affordable for the 2021 tax year, and FPL safe harbor is met. Using the FPL Safe Harbor to provide ACA affordability could cost ALEs more because the monthly premium contribution amount for employees is lower than calculating individual contributions per employee.
3. Rate Of Pay Safe Harbor
The Rate of Pay Safe Harbor is a procedure based on an employee's monthly or hourly salaried rate. Calculate to determine if coverage is affordable under the Rate of Pay Safe Harbor for the 2021 tax year. Using hourly employees' earnings:
- Take the employee's lowest hourly rate from the first day of the coverage period and multiply it by 130.
- Take this product and multiply it by the ACA affordability threshold of 2021 that is 9.83%.
It will identify the maximum monthly premium that the employee might have to pay to meet 2021 ACA affordability. Take the monthly salary from the first date of the coverage period and multiply it by the affordability percentage of the current year for a salaried employee.
Plan Nuances That Might Affect ACA Affordability
Wellness plans, opt-out payments, Health Reimbursement Arrangements (HRAs), and flex credits are some of the most common considerations that might decrease or increase the ACA affordability of an employer-sponsored health plan.
Implementing safe harbors when managing your health plan and communicating this information to the IRS are two different things. Applying the correct code combinations is crucial to avoid the issuance of Letter 226J to your organization that the IRS is issuing for the 2018 tax year currently.
Conclusion
Choosing an IRS affordability safe harbor to prove ACA affordability might be difficult. Employers should choose what makes the most sense for their business and must know that they don't have to apply one safe harbor across their workforce.
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