By: HUB’s EB Compliance Team
The IRS recently announced the Affordable Care Act (“ACA”) affordability percentage for the 2025 calendar year. Additionally, many employers are currently finalizing their 2025 medical plan contributions, which makes this an opportune time to discuss common ACA affordability myths and how employers can better understand them.
Background
As a reminder, under the ACA employer mandate, applicable large employers are generally required to offer at least one health plan that provides affordable, minimum value 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 specified percentage of the employee’s household income.
Since employers do not know the household income of their employees, the IRS created three safe harbors employers can rely on when determining whether an offer of coverage is affordable. These save harbors, along with their advantages, disadvantages, and limitations, are discussed in more detail here.
Myth 1 – Every Coverage Tier Must be Affordable
Fact 1 – Affordability is Based Solely on Employee Only Coverage
Employees have varying coverage needs depending on the eligible family members they seek to cover. This is why most employers offer multiple enrollment tiers. For example, ABC Corp offers an employee only tier, an employee plus spouse tier, an employee plus child tier, and a family tier. Employees can then select the tier of coverage that meets their needs.
Imagine Able, Baker, and Charlie are all offered employee only coverage that is affordable. This ends the employer’s analysis of affordability. Able may enroll in the employee only tier, Baker may enroll in the employee plus spouse tier and Charlie may enroll in the family tier, but their choices do not impact affordability.
One exception to this rule relates to the removal of the family glitch. If the employee’s offer of family coverage is not affordable (based on the employee’s household income), the employee’s spouse and certain dependent children may become eligible for subsidized coverage. Helpfully, an employer’s failure to offer affordable family coverage does not subject the employer to risk of ACA penalties if the employee’s spouse and/or children receive subsidized coverage.
Myth 2 – If Employers Offer Multiple Plan Options, They All Must be Affordable
Fact 2 – Employees Only Need to be Offered One Affordable Option
While some employers only offer a single plan option, many employers offer multiple options. For example, Employer A may offer two different PPO plan options, while Employer B may offer two PPO plan options and one High Deductible Health Plan (“HDHP”). When employers offer more than one plan option to all their full-time employees, only one such option needs to be affordable under the ACA.
Using Employer B from above as an example, this means so long as the HDHP was affordable and offered to all full-time employees, their PPO options would not need to be affordable. While the PPOs may be affordable for higher earning employees, these options would not need to be affordable for lower earning employees who were offered the HDHP. If a lower earning employee enrolls in an unaffordable PPO this does not impact ACA affordability.
Myth 3 – Employers Can Use the Same Plan to Meet Affordability for All Employees
Fact 3 – Affordability is Based on the Coverage Actually Offered to Employees
Building on Myth 2, some employers offer different plan options in different geographic areas. This is particularly the case with HMOs and narrow-network plan options. For example, A3 Corp may offer all employees a PPO and an HDHP, but employees in a California may also be offered an HMO. A3 Corp can calculate affordability based on the HMO rates, but only for those employees actually offered the HMO.
A3 Corp will need to separately calculate affordability based on either the PPO or HDHP for employees who live outside California. Because employees outside California are not eligible for the HMO, A3 Corp cannot use the HMO rates to determine affordability for these employees.
Myth 4 – The Rate of Pay Safe Harbor is Based on How Many Hours the Employee Works
Fact 4 – The Rate of Pay Safe Harbor is Based on 130 Hours Per Month
The rate of pay safe harbor can be used for both hourly and salary employees, although it is most often used for hourly employees. The safe harbor calculation begins by taking the employee’s hourly rate of pay and multiplying it by 130 hours. 130 hours is used because this is the ACA definition of full-time.
Under this safe harbor, the actual hours worked by an employee are not considered. For example, if an employee with a serious health condition does not work for a period of time, this will reduce their income, however this reduction does not impact the calculation under the rate of pay safe harbor. Similarly, if an employer’s business slows and they reduce an employee’s hours to 20 per week, there is no change to the rate of pay safe harbor calculation.
The certainty provided under the rate of pay safe harbor also means employers cannot consider hours worked beyond 130 per month for calculation purposes. In this way, the rate of pay safe harbor may not necessarily allow the employer to charge the highest possible premium, particularly if employees regularly work more than 130 hours per month.
Myth 5 – The W-2 Safe Harbor is Based on the Employee’s Annual Salary or Gross Income
Fact 5 – The W-2 Safe Harbor is Based on the Employee’s Taxable Income
Many employers rely on the W-2 safe harbor to meet ACA affordability as it potentially allows the employer to charge a greater premium than the rate of pay safe harbor allows. This is particularly valuable when employees regularly work more than 30 hours per week or 130 hours per month. However, the W-2 safe harbor is based on the employee’s taxable income as reported in Box 1 of the W-2.
Taxable income is determined based on the employee’s gross income, minus pre-tax deductions. This means two employees with the same gross income may have very different Box 1 amounts, depending on their pre-tax deductions. For example, Laverne and Shirley may both earn $15 per hour and work 2,000 hours in the year, but their Box 1 amounts may vary significantly. Laverne may waive benefits as she is covered under her parent’s plan, while Shirley may also waive coverage but chooses to make pre-tax retirement contributions. Thus, if their employer calculated affordability based on gross income, Shirley’s offer of coverage may not be affordable, which could lead to penalties.
Myth 6 – Wellness Programs do not Impact Affordability
Fact 6 – Wellness Programs Impact Affordability in Different Ways
Wellness programs come in many different varieties. The exact program requirements and form of any incentives offered to program participants will determine the impact to affordability, if any.
Wellness programs only impact affordability if the incentive is a premium differential. For example, Acme Corp offers employee only coverage at a rate of $150 per month, but employees who participate in their wellness program can enroll in this same coverage for $125 per month.
If Acme’s wellness program requires participants to either be non-tobacco users or complete a tobacco cessation program, Acme can base affordability on the employee only rate of $125 per month. If Acme’s wellness program has other requirements unrelated to tobacco use, such as the completion of a biometric screening, Acme is required to base affordability on the $150 per month rate. This requirement extends from the requirement that wellness programs be voluntary.
Some wellness programs have tobacco and non-tobacco components, which adds complexities to affordability. Building on the example above, Acme can also add a $10 per month incentive for those who complete a biometric screening to the existing program. In this scenario, Acme would now offer the following rates.
| Tobacco Incentive | Biometric Incentive | Rate |
|---|---|---|
| No | No | $150 |
| No | Yes | $140 |
| Yes | No | $125 |
| Yes | Yes | $115 |
Acme would still base their affordability calculations on $125 per month as this is the rate tied to non-tobacco use. Acme cannot use $115 per month for affordability because employers cannot use incentives unrelated to tobacco use in their affordability calculations. If a program only has a single incentive for both non-tobacco use and some other factor, then affordability must be based on the amount charged without regard to the incentive.
Conclusion
Meeting the ACA’s affordability requirement is a necessary for an applicable large employer to avoid penalties. To successfully offer affordable coverage employers need to both understand the calculations themselves and the numbers the calculations are based on and the limitations of the safe harbors (discussed more here). Not using the correct premium amount or employee’s income can lead to offers of coverage not meeting affordability and potential employer penalties.
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.