Generally, the Affordable Care Act (ACA) requires coverage under a group health plan sponsored by an “applicable large employer” (at least 50 full-time equivalent employees) to be “affordable,” as determined under the ACA, in order to avoid certain penalties.
“Affordability” is based on whether the premium for employee-only coverage is less than a certain percentage of an employee’s household income or a designated safe harbor amount. According to a blog from the law firm Haynes and Boone LLP, the Internal Revenue Service (IRS) has increased the affordability percentage for 2019 to 9.86%, up from 9.56% in 2018.
When the law was passed, the affordability percentage was 9.5%. Because employers generally will not know an employee’s household income, the regulations provided certain safe harbors that employers may use to measure affordability. In general, an employer using one of the safe harbors must satisfy one of the following tests:
- Form W–2 safe harbor. In general, the required employee contribution for self-only coverage for the lowest cost option that provides minimum value must not exceed 9.5% of the employee’s Form W–2 wages for that calendar year. If an employee was not a full-time employee for the entire calendar year, the employee’s Form W–2 wages are adjusted to reflect the period when the employee was offered coverage and the employee’s share of premiums for that period. Note that the safe harbor will apply on an employee-by-employee basis and that the employer will not know for certain if it has satisfied the requirements of the safe harbor until the end of the calendar year, unless the contribution toward coverage is set as a percentage of wages.
- Rate-of-pay safe harbor. In general, the employer may take the hourly rate of pay for an hourly employee and multiply that rate by 130 to determine affordability for self-only coverage for the lowest cost option that provides minimum value based on this monthly wage. Affordable coverage must require a contribution of no more than 9.5% percent of the monthly wage. For salaried employees, monthly salary is used to make this determination. The employer may not reduce the hourly wage rate for hourly employees or the monthly wages of salaried employees during the year.
- Federal poverty level (FPL) safe harbor. The employee’s required contribution for the lowest-cost self-only coverage providing minimum value must not exceed 9.5% of the most recently published federal poverty level for a single individual.