An offer of coverage by an applicable large employer to a full-time employee must be “affordable” and meet minimum value to avoid the penalties under 4980H(b) (the “bad” penalty).  To be eligible for an affordability safe harbor, an applicable large employer must offer Minimum Essential Coverage (MEC) to at least 95% of its full-time employees and their dependents, and Minimum Value (MV) with respect to the self-only coverage offered to the employee. We’re getting ahead of ourselves, but if you do not offer MEC to at least 95% of your full-time employees and their dependents, you may not include a safe harbor code in Line 16 of Form 1095-C. 

Coverage is not affordable if the cost to the employee exceeds 9.5% (indexed to 9.12% in 2023) of an employee’s household income. Because employers do not have a reasonable way to determine an employee’s household income, the IRS allows them to use “affordability safe harbors.” 

There are three affordability safe harbors: (1) The Federal Poverty Line Safe Harbor, (2) the Rate of Pay Safe Harbor, and (3) the W-2 Safe Harbor. Some of this stuff is complicated. Hang on to your hats.

Federal poverty guidance is published in the Federal Register by the federal Department of Health and Human Services (HHS) in mid-January of each year. As soon as it is published, it is reported in a wide range of secondary sources, including HHS websites. We’ll also report it here.

The rule itself says that employers must use the federal poverty line for the state where their employees resides, but IRS instructions to Forms 1094 and 1095 allow employers in the 48 contiguous states to use the same figure (if you have employees in Alaska or Hawaii, you have to use poverty guidance specific to those states, and you have one heck of a work-from-home policy if you’re a Minnesota public employer).

Non-calendar year plans get a better deal, at least in 2023 where the affordability percentage had an unexpected drop from 9.61% in 2022 down to 9.12% in 2023. The FPL Safe Harbor applies on a plan year basis rather than a calendar year basis.  This means non-calendar year plans beginning in 2022 will continue to use 9.61% to determine affordability into 2023 until its new plan year begins, at which point they will use 9.12%.  It means that they will continue to use the FPL from 2022 of $13,590 into 2023 until their new plan year begins, at which time they will use the FPL for 2023 of $14,580.  The FPL safe harbor for a non-calendar plan year that begins in 2022 (and continues until the new plan year begins in 2023) is determined as follows:  

• (9.61% for 2022 x $13,590 FPL in 2022) ÷ 12 = $108.83 (rounded to the nearest penny).

When the non-calendar year plan renews in 2023, it may use any FPL within 6 months prior to the beginning of the plan year.  While a plan year that begins on July 1 could use the FPL from 2023 of $13,590 because the FPL had not been published by January 1 of 2023, it will most likely use the FPL published in mid-January in the amount of $14,580, because it allows the plan to charge more for self-only coverage.  Non-calendar year plans that renew in 2023 must use the 2023 affordability percentage of 9.12% on their renewal date.  The FPL Safe Harbor for a non-calendar plan year beginning on July 1, 2023, would be determined as follows:

• (9.12% for 2023 x $14,580 FPL in 2023) ÷ 12 = $110.81 (rounded to the nearest penny).

The Rate of Pay Safe Harbor is a method for proving ACA affordability that is based on an employee’s hourly rate or monthly salary rate. The IRS doesn’t accept the rate of pay safe harbor for tipped employees or for employees who are compensated solely on the basis of commissions. Local government employees don’t work for tips, at least not legally, so no worries there.

The Rate of Pay Safe Harbor is calculated differently for hourly and salaried workers. For an hourly employee, the employer uses working hours of 130 hours per calendar month, and multiplies those hours by the employee’s rate of pay, regardless of whether the employee actually works more or less than 130 hours during a calendar month. It doesn’t matter if the employee takes an unpaid leave of absence or otherwise has reduced hours in one or more months during the calendar year. The Rate of Pay Safe Harbor for an hourly employee is determined as follows:

Sheila earns $20 per hour leading walking tours for the City of Paul Bunion, an Applicable Large Employer. The plan is based on the calendar year. To fall within the Rate of Pay Safe Harbor in 2022, she may not be required to pay more than $249.86 per month for the lowest cost self-only coverage that provides minimum value, determined as follows: $20 per hour x 130 hours per month x .0961 (the affordability percentage).  Sheila elects to reduce her compensation under the city’s cafeteria plan by $249.86 per month so she may pay the premium with pre-tax dollars.

In July, Sheila sprains her ankle.  She takes a 30-day FMLA leave because of a serious health condition that makes her unable to perform one or more of the essential functions of her position.[1]  The leave is unpaid, but her hourly premium rate is the same and she remains enrolled in coverage. The fact that her hours fluctuate is immaterial under the Rate of Pay Safe Harbor, and she pays the same amount for insurance.

Because of the requirement to report individual contributions based on the rate of pay on Line 15 of form 1095-C, the Rate of Pay (and W-2) Safe Harbor increases the workload for employers and their 1095-C service providers.  It also increases the likelihood of mistakes.  But employers may use any of the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.  Reasonable categories generally include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable category.

An employer might use the Federal Poverty Line Safe Harbor for hourly workers and set a fixed employee contribution for a reasonable class of salaried workers that is (1) higher than the Federal Poverty Level Safe Harbor and (2) lower than the Rate of Pay Safe Harbor for the lowest-paid salaried worker in the class.  Theoretically, they could ladder up the pay scale, charging more to reasonable classes of higher paid workers.  Highly paid employees save more in taxes when they pay premiums through salary reduction under a cafeteria plan, and employers could consider giving them a small bump in pay.