Analysts expect employer medical costs to increase by 6.5% in 2022, an increase that’s slightly lower than 2021 but higher than it was from 2016 to 2020. This begs the question: How can you minimize your cost increases while continuing to offer affordable coverage to your employees?
Accurately calculating ACA affordability for the health insurance plans you offer helps avoid paying too much. You also avoid costly fines and penalties for non-compliance with the ACA.
An ACA affordability safe harbor lets you see what your employees' maximum cost for health coverage should be. Using a safe harbor protects you if the IRS threatens you with a penalty.
Continue reading to learn more about federal safe harbors types and how they can help you comply with the ACA.
ACA Affordability Requirements
The Affordable Care Act (ACA) requires applicable large employers to offer affordable health coverage to at least 95% of their full-time employees. These provisions apply to employers with 50 or more full-time or full-time equivalent employees.
The ACA bases its definition of affordable on the employer's least expensive, self-only plan that meets ACA minimum essential coverage requirements. An employee's required contribution must be less than a certain percentage of their household income. The IRS adjusts this percentage every year to account for inflation.
For 2022, ACA affordability compliance dictates an employee's contribution must not be more than 9.61% of their household income. ACA reporting follows the calendar year. If your plan year spans two calendar years, two different contribution percentages will apply.
Reporting and Penalties
Applicable large employers must report information about the health coverage they offer their full-time employees to the IRS.
Penalties apply to employers who don't comply with the Affordable Care Act requirements. Employers who don't offer appropriate coverage to at least 95% of their full-time workforce will face a penalty. Employers whose coverage doesn't fit the ACA definition of affordable will face penalties as well.
The IRS assesses penalties for each month an employer doesn't offer an eligible employee an affordable, minimum value plan.
What Is an ACA Affordability Safe Harbor?
An ACA affordability safe harbor is a technique an employer can use to prove affordability. The ACA affordability rule is based on an employee's household income. However, employers usually don't know their employees' household income.
Federal safe harbor types give you a way to calculate whether employee contributions fall within the affordability standard. The ACA and the IRS don't require the use of an affordability safe harbor. Using a safe harbor helps shield you from potential employer shared responsibility penalties, though.
Federal Safe Harbor Types
Employers have three possible methods for calculating the affordability of their health plan offerings:
- Form W-2
- Rate of Pay
- Federal Poverty Line
Each type of federal safe harbor has its advantages and disadvantages. Understanding how each safe harbor works is important before deciding on which one to use.
Form W-2 Safe Harbor
The W-2 safe harbor uses an employee's wages as reported in Box 1 of form W-2. Multiply the affordability percentage by the wages in Box 1 of the employee's W-2. If the annual cost to the employee for the least expensive compliant health plan is equal to or lower than this amount, the IRS considers the coverage affordable.
The W-2 method uses the employee's wages for the current year. This poses a challenge because the employer may not know if the coverage they offered was affordable until the end of the year.
This safe harbor can be 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. Employers can use information from the previous year's W-2 to set rates for the next year.
Rate of Pay Safe Harbor
The rate of pay safe harbor uses an employee's regular rate of pay. You can use this method for hourly and salaried employees. The IRS doesn't accept the rate of pay safe harbor for employees with tips or commissions as their entire compensation.
To calculate affordability for hourly employees, you can assume 130 hours worked per month no matter how many hours an employee actually worked. 130 hours is the minimum number to count as full-time under the ACA.
Multiply 130 by the employee's hourly wage. Then multiply that amount by the affordability percentage. The cost per month for the lowest-level health plan must be equal to or less than the final figure.
For salaried employees, multiply the affordability percentage by the employee's salary as of the first day of the coverage period.
The rate of pay safe harbor can expose you to a greater risk of penalties if your employees have widely varying wage rates. You can minimize this risk by using the lowest hourly rate or the lowest applicable salary to calculate affordability.
Federal Poverty Line Safe Harbor
The federal poverty line (FPL) safe harbor uses the annual individual mainland FPL. Multiply the FPL by the affordability percentage and compare it to the employee cost for the least expensive self-only plan.
The Department of Health and Human Services publishes the FPL in January. Regulations allow employers to use the FPL in effect six months before the start of the plan year, though.
The FPL safe harbor makes calculating affordability easier. You don't have to calculate for individual employees.
However, this method is the most conservative. In most cases, an employer will pay more to offer health coverage using the FPL safe harbor than with the W-2 or rate of pay methods.
Applying Safe Harbors to Employees
An employer can use different federal safe harbor types for different employees. However, the distinctions must fit into categories the IRS has established. Acceptable categories include:
- Salaried versus hourly employees
- Specified job classifications
- Employees who work in different states
- Employees with or without collective bargaining
A safe harbor must apply consistently to all employees within a category. Employers can change safe harbors in future plan years. The change must apply consistently and uniformly to all affected employees.
Reporting the Use of a Safe Harbor
An employer who uses a safe harbor must report it on any required Form 1095-C. Each safe harbor method has its own code.
Reporting the use of a safe harbor is especially important in cases where an employee has declined coverage. This protects you in the event that an employee self-reports to the Marketplace that no affordable health coverage option was available.
Reducing Your Risk With Safe Harbors
The ACA affordability standards can be complicated to apply. Using a safe harbor helps protect you and your business from potentially large fines and penalties. You want to be sure your health coverage offerings are fully compliant while offering you and your employees the best value.
ACA Reporter by Points North includes all the regulations and tracking rules to help ensure ACA affordability requirements are met. You don't need to worry about rules for safe harbors, measurement periods, or complex employment situations. We'll simplify your ACA reporting so you can focus on running your business.
Contact us today to schedule a free demo and start minimizing your liabilities.