Introduction:
For HR professionals working in companies with 50 or more full-time employees, complying with the Affordable Care Act (ACA) is essential. Applicable Large Employers must provide minimum essential coverage that is both affordable and meets certain criteria. In this article, we'll explore the concept of affordability, the IRS's affordability percentage guidelines, and three safe harbors available to determine plan affordability.
1. Understanding Plan Affordability:
Applicable Large Employers are required to offer at least 95% of their full-time employees minimum essential coverage that is considered affordable. Affordability is defined based on the premium for self-only coverage not exceeding a certain percentage of the employee's household income.
2. The IRS Affordability Percentage:
The IRS sets the affordability percentage annually. In 2023, the percentage is 9.12% while in 2022 it was 9.61%. This baseline percentage serves as a benchmark for employers to determine if their offer of coverage meet the affordability requirement for a particular employee. The coverage may cost not more than the set percentage of the employee’s household income.
3. ACA Affordability Safe Harbors:
To simplify the process of determining affordability, employers can use one of three ACA affordability safe harbors. These safe harbors provide alternative methods to assess affordability without requiring detailed knowledge of each employee's household income.
Since household income is not readily available, employers use one of three ACA affordability safe harbors to determine if their plans are affordable.
- W-2 Safe Harbor. An employer’s offer of coverage will be considered affordable if the employee’s required contribution for the employer’s lowest cost single-only coverage that provides minimum value does not exceed the affordability percentage (9.12% in 2023) of the employee’s Form W-2 wages.
- Rate of Pay Safe Harbor. An employer’s offer of coverage will be considered affordable if the employee’s required contribution for the employer’s lowest cost single-only coverage that provides minimum value does not exceed the affordability percentage (9.12% in 2023) of the employee’s monthly salary (for hourly employees, this is generally hourly pay x 130 hours).
- Federal Poverty Line (FPL) Safe Harbor. An employer’s offer of coverage will be considered affordable if the employee’s required contribution for the employer’s lowest cost single-only coverage that provides minimum value does not exceed the affordability percentage (9.12% in 2023) of the monthly Federal Poverty Line for a single individual.
Many employers wish to use the Federal Poverty Line Safe Harbor as it is easily calculated and can allow an employer to identify Code 1A on Line 14 of an employee’s Form 1095-C, which the IRS seems to prefer.
Conclusion:
As HR professionals navigate the complexities of ACA compliance for Applicable Large Employers, understanding plan affordability and safe harbor options is crucial. While each safe harbor provides a different method of assessing affordability, the Federal Poverty Line Safe Harbor is a popular choice due to its simplicity and IRS preference. By staying up-to-date with the IRS's annual percentage guidelines, HR professionals can ensure their company's health plans remain compliant with ACA regulations.
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