Affordability for individuals purchasing coverage on the ACA state exchanges is based on the individual’s household income (and certain other factors). ALEs, however, cannot base affordability on employees’ household incomes. This is because employers typically do not know their employees’ household incomes, nor are employers entitled to know their employees’ private household income amounts. Because of this, the ACA allows ALEs to set premiums according to information the employer does have. These are called the ACA’s affordability “safe harbors” for employers.
Affordability is based on the employee’s contribution for the lowest-cost MEC/MV plan offered to the employee — at the “employee only” rate. It is not based on the plan the employee actually enrolls in, but instead on the lowest-cost MEC/MV plan offered.
Additional rates for spouse or dependents are not considered in this calculation. As long as the employee’s contribution does not exceed a certain threshold percentage per year (on a monthly basis), based on any of the three safe harbors, the plan is considered affordable.
Affordability for plan years beginning in 2024 is 8.39%.
Affordability for plan years beginning in 2023 is 9.12%.
Affordability is based on plan year, not calendar year. For example, a plan with a 12/1/2023 effective date will use the 9.12% ratio for 12/1/2023 – 11/30/2024. Then on 12/1/2024, the 8.39% ratio will be used through 11/30/2025.
AFFORDABILITY SAFE HARBORS
Employees’ Rate of Pay
- Employers calculate affordability under this scenario in one of two different ways, according to whether the employee is paid on an hourly or salary basis.
- For salaried employees, ALEs can use employees’ actual monthly salaries as of the first day of the coverage period. That monthly amount is multiplied by the plan year’s affordability percentage threshold to determine the maximum monthly premium (contribution) an employee can be charged for the plan, at the employee-only rate, under this safe harbor. This safe harbor is not available to use if the monthly salary is reduced, including a reduction of work hours.
- For hourly employees, affordability must be calculated using the employee’s rate of pay at the beginning of the plan year. However, the employer should make an adjustment to this calculation during the plan year if an employee experiences a decrease in pay. Furthermore, the employer must calculate an hourly employee’s rate of pay under this safe harbor at 130 hours/month, even if the hourly employee provides more than 130 hours of service per month (including overtime, if applicable) — which is very common. This is because the ACA considers a FT employee as one who averages 130 hours of service/month.
- Example: Hourly employee earns $16/hour and normally works 40 hours/week (160-170 hours/month)
- $16 x 130 hours = $2,080
- $2,080 x 8.39% = $174.51
- As long as the employee’s contribution (at the “employee only” rate) for the lowest-cost plan offered does not exceed a monthly cost of $174.51 for the 2024 plan year, then the offer is considered “affordable” for this employee under the Rate of Pay safe harbor.
- Example: Hourly employee earns $16/hour and normally works 40 hours/week (160-170 hours/month)
W-2 Box 1 Income for the Corresponding Year
- Employers can base affordability on an employee’s W-2 Box 1 income for the corresponding tax year. This safe harbor option is intended to be utilized only at the end of the calendar/tax year, as a way of evaluating affordability on a “look back” basis when preparing ACA reporting forms for the IRS.
Federal Poverty Level (FPL)
- Employers can use the FPL to set contributions for all employees. The employer should use the FPL as of six months prior to the beginning of the plan year. This is because the FPL isn’t published until January/February of a given calendar year.
When an ALE reports its offers of coverage to the IRS, it must indicate which affordability safe harbor it used to determine affordability. The employer should seek to ensure affordability when setting employer contributions before the policy’s effective date/renewal.
An ALE can use whichever affordability safe harbor it prefers when reporting to the IRS. For example, an ALE may initially set contributions based on employees’ rates of pay. However, when the ALE completes its ACA IRS reporting, it can use the W-2 Box 1 income safe harbor or the Federal Poverty Level safe harbor. The ACA requires ALEs to use the same safe harbor method for any “reasonable category of employees.”
Most ALEs desire to use the Federal Poverty Level safe harbor — if the employer can afford to do so. Use of this specific safe harbor can potentially simplify ACA reporting to the IRS.
Important: ALEs should be aware that different employees may be offered different health insurance plans, depending on the employee’s geographic location. When determining affordability, ALEs must make sure that the plan they use is actually available to the employee. For example, a bronze HMO plan may be the cheapest plan for most employees, but it is not available to out-of-state employees, who can only use the PPO plan. In this case, the ALE must use the lowest-cost (minimum value) PPO plan for the out-of-state employees because the HMO plan is not available to them.
Refer to Word & Brown’s exclusive ACA Affordability Calculator for help making this determination.