Understanding the ACA Affordability Calculation

Despite recent changes to the ACA,* employers remain responsible for complying with the act’s mandate to offer adequate, affordable health care coverage to their eligible employees, or potentially pay a tax to the IRS**. And while “affordability” is subjective in common parlance, the law considers a plan affordable when the employee-paid premiums for the lowest-cost employee-only plan available are no more than 9.5% of an employee’s household income. This percentage is updated every year to account for inflation – the rate for plan years beginning in 2020 is 9.78%.

Safe Harbors

Because employers do not typically know their employees’ household income, the law offers three alternative methods for calculating a plan’s affordability, called safe harbors.

Form W-2 Safe Harbor

To use this safe harbor, multiply the annual affordability percentage by the wages listed in Box 1 of the employee’s Form W-2. If the annual employee-paid premium of the lowest-cost employee-only plan is lower than the calculated amount, the coverage is considered affordable. Employers should note that because this method uses the current year’s wages, they may not know if the coverage they offered was affordable until the end of the year.

Federal Poverty Line (FPL) Safe Harbor

Using the FPL safe harbor can simplify affordability calculations; this is the easiest safe harbor to administer because it does not have to be calculated employee by employee. The current year’s affordability percentage is multiplied by the FPL for a single individual and this total is compared, again, to the employee-paid premium for the lowest-cost employee-only plan. If the annual employee contribution is lower than the FPL calculation, the plan is considered affordable.

Rate of Pay Safe Harbor

For salaried employees, calculate Rate of Pay safe harbor by multiplying annual salary at the start of the plan year by applicable affordability percentage. Compare that to the employee-only annual required contribution for the lowest cost plan available. Rate of Pay safe harbor cannot be used for a salaried employee whose salary is reduced during the plan year.

For hourly employees, calculate Rate of Pay safe harbor month by month by using the lower of 1) the hourly rate of pay on the first day of the plan year, multiplied by 130, multiplied by the applicable affordability percentage or 2) the lowest hourly rate of pay during the calendar month multiplied by 130, multiplied by the applicable affordability percentage. A short cut with the rate of pay safe harbor is to start with the lowest-paid employee and run the calculation for that person – if it is affordable for the lowest paid employee, it will be affordable for all those making more money and you will know that you can use the safe harbor for all employees.

Different safe harbors can be used for different employees, but only for IRS allowed categories, which are:

Salaried versus hourly employees;
Employees who work in different states;
Collectively bargained versus non-bargained employees; or
Each group of collectively bargained employees covered by a different agreement.