By: HUB’s EB Compliance Team

Considering the increase in the enforcement of the Affordable Care Act (“ACA”) employer shared responsibility mandate, it is important for applicable large employers (ALEs) that are subject to this mandate to review the safe harbors they are using for affordability. (More detail on the mandate is available at the link above.)

Overview

Under the Affordable Care Act’s employer shared responsibility mandate, an applicable large employer is generally required to offer at least one health plan that provides affordable, minimum value and minimum essential coverage to its full-time employees (and minimum essential coverage to their dependents) or pay a penalty. For this purpose, “affordable” means the premium for self-only coverage cannot be greater than a 9.61% (for 2022) of the employee’s household income.

The obligation to offer “affordable” coverage only applies to employee-only coverage; employers may can require that employees pay the full cost of dependent coverage. This is true even under the proposed rules to fix the so-called “family glitch,” as those proposed rules only determine whether a family member can receive a tax credit for individual coverage.

Determining whether your plan is affordable can be tricky since most employers do not know an employee’s household income. However, under a special rule, the IRS will treat employer sponsored coverage to be affordable if the cost is 9.61% (for months in 2022) of one of the following three optional “safe harbors”. These are alternatives employers can use in lieu of determining an employee’s household income.

1. Federal Poverty Level (FPL) Safe Harbor

Under this safe harbor, the employer assumes the employee earns income at the U.S. federal poverty level for the state the employee is employed (for 2022 $13,590 for the mainland, $16,990 for Alaska and $15,630 for Hawaii).

The employer only charges 9.61% (for months in 2022) of that amount for employee-only coverage for each month during a calendar year. This means an affordable monthly premium under this safe harbor for 2022, using the 2022 FPLs, would be $108.83 for the mainland, $136.06 for Alaska, and $125.17 for Hawaii. Note that for plans that renew or have plan years that start on January 1 or other early months in the calendar year, will typically have to use last year’s FPL because the FPLs are not released until January or February.

Advantages: This option is the easiest to use and is uniform for all employees. It also typically provides the most affordable option for employees. Using the FPL as a safe harbor also allows employers to pursue simplified reporting for Forms 1095-C as an employer is not required to complete Line 15 or 16 of Forms 1095-C.

Disadvantages: It is almost always the most expensive affordability safe harbor to use, unless the employer has employees earning the federal minimum wage ($7.25 an hour for 2022) or less than $8.75 per hour. By using 100% of the FPL, for employees earning less than $8.75 per hour, the employer can charge slightly more for employee only coverage than what the employer can charge under the rate of pay safe harbor. However, if employers have employees in states earning amounts greater than $8.75 per hour, using 100% of the FPL would increase the employer’s health care expenditures.

2. Rate of Pay Safe Harbor

Under this safe harbor, the employee’s hourly rate of pay (hourly/non-exempt employees) or the employee’s monthly salary (salaried/exempt employees) is used to establish the employee’s share of the cost of employee-only coverage. To meet this safe harbor, the cost of employee only coverage cannot to exceed 9.61% (for months in 2022) of the employee’s hourly rate of pay for hourly employees, and for salaried employees, 9.61% of the employee’s monthly salary. For hourly employees, the employer takes the employee’s hourly rate of pay, multiplies it by 130, and then multiplies that amount by 9.61% (for 2022). For salaried employees, the employer will use the monthly salary and multiplies that amount times 9.61%.  In either case, the result is the maximum amount an employer can charge for the lowest cost plan available to that employee. 

Advantages: This safe harbor works well for groups that have stable, predictable pay at the beginning of the year. The plan will be deemed to be affordable, even if the employee’s hours of work are reduced later in the year, as long as the employee’s rate of pay or monthly salary does not decrease during the year. (If it does decrease, the lower rate of pay/salary must be used.)

Disadvantages: It may require individual calculations for each employee, unless the employer sets affordability based on the lowest hourly paid employee. This safe harbor should not be used for employees who are paid on a largely variable basis, like commissioned employees, employees who are paid per mile or per load/piecemeal, or employees whose income is largely based on tips (like restaurant servers).

3. W-2 Safe Harbor

Under this third and final safe harbor, the employee-only premium cannot be more than 9.61% (for months in 2022) of the employee’s earnings reported in Box 1 of the Form W-2 for the calendar year. To use this safe harbor, the employee’s earnings must be projected for the upcoming calendar year. Note that Box 1 of the Form W-2 represents the employee’s gross wage minus any pre-tax deductions made by the employee (premiums paid with pre-tax dollars, HSA contributions, contributions made to Health FSA or DCAP plans, transit, and parking) and employee contributions to a 401(k) plan. An employer will not know until the end of the calendar year if their Box 1 Form W-2 projections were correct or not. The employee’s contribution dollar amount or percentage of pay must stay the same throughout the calendar year (or at least the portion of the plan year that is in a calendar year, if the plan does not have a calendar plan year). For employees that are hired or terminate employment during a year, it is possible to base the safe harbor on a pro rata portion of the employee’s W-2 wages.

Advantage: If employees do not usually participate in plans that allow for pre-tax deductions or contribute to a 401(k) plan, the employer is in most cases able to set employee contributions for employee only coverage at a higher threshold than rate of pay or 100% of the FPL safe harbor.

Disadvantages: Employers do not know what an employee’s pre-tax, or 401(k) plan contributions will be for the upcoming year and therefore must estimate or project what the employee’s Box 1 of the Form W-2 may be. Unfortunately, an employer’s projection may be wrong as the employee can experience a reduction in hours, go on a leave of absence, or increase their pre-tax deductions (e.g., by adding dependents or increase 401(k) plan contributions). In that case, they will not find out until after the end of the year that they in fact did not offer affordable coverage to the employee during the calendar year (in fact, the IRS is asserting this frequently in current employer mandate enforcement actions). Additionally, this safe harbor must be used for the entire calendar year; the employer cannot change to another safe harbor for part of the year. Given the challenges with this safe harbor, many employers avoid using it in favor of one of the other safe harbors.

Additional Conditions

To use any of the above safe harbors, the employer must offer its full-time employees and their dependents the opportunity to enroll in the plan and the coverage must provide minimum value for the employee. An employer can also choose to apply different safe harbors (or no safe harbor) to different reasonable, categories of employees, such as hourly vs. salaried, employees working in different geographic locations, and others. However, listing employees by name does not qualify.

Closing Thoughts

While the safe harbors are helpful for employers, each one comes with its own strings. An employer looking to avail itself of one or more of these safe harbors should carefully weigh the advantages and disadvantages of each safe harbor in determining which one is right for them.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.