Pay Adjustments That Impact ACA Affordability

Many employers review Affordable Care Act (ACA) affordability before the beginning of the plan year and assume their work is complete. However, changes that occur throughout the year can affect whether an employer’s health coverage continues to satisfy the ACA’s affordability requirements.

Taking time for a mid-year review can help employers identify potential issues before they impact employee coverage, IRS reporting, or employer shared responsibility penalties.

Understanding ACA Affordability

Applicable large employers (ALEs) must generally offer affordable, minimum value health coverage to full-time employees and their dependents to avoid potential employer shared responsibility penalties.

Because employers typically do not know an employee’s household income, many rely on one of the IRS affordability safe harbors, such as the W-2, Rate of Pay, or Federal Poverty Level safe harbor, when determining whether coverage is affordable.

Pay Changes Can Affect Affordability

Employee compensation often changes during the year. While many pay increases will not create affordability concerns, certain changes may warrant a closer review.

Examples include:

• Hourly wage reductions.
• Employees moving from full-time to lower-paying positions.
• Changes in regularly scheduled hours.
• Unpaid or partially paid leaves of absence.
• Payroll adjustments affecting compensation.

Employers using the Rate of Pay safe harbor should pay particular attention to reductions in an employee’s hourly rate, as these changes may affect affordability calculations.

Review Employee Contributions

Affordability depends not only on employee wages but also on the amount employees are required to contribute for coverage.

Employers should review whether any mid-year changes have affected employee premium contributions, including:

• Plan design changes.
• Contribution adjustments.
• Wellness incentive changes.
• Tobacco surcharge modifications.

Even relatively small changes can affect affordability for certain employee groups.

Coordinate HR, Payroll, and Benefits Administration

Many ACA affordability issues result from communication gaps rather than misunderstandings of the law.

HR, payroll, and benefits administration should communicate regularly regarding:

• Compensation changes.
• Position changes.
• Changes in scheduled work hours.
• Leaves of absence.
• Benefit contribution updates.

Ensuring that all departments are working from the same information helps reduce administrative errors and supports accurate ACA reporting.

Prepare for the Next Plan Year

A mid-year review also provides an opportunity to begin planning for the upcoming plan year. Employers should evaluate whether projected employee contributions will remain affordable under the selected safe harbor and determine whether adjustments should be made before open enrollment begins.

Addressing potential issues early gives employers more flexibility than waiting until Forms 1095-C are being prepared.

Questions to Consider

As part of your review, consider asking:

• Have employee pay rates changed significantly since the beginning of the plan year?
• Have employee contribution amounts increased?
• Are payroll and benefits systems using current compensation information?
• Is the affordability safe harbor your organization selected still appropriate?
• Have HR and payroll coordinated changes that could affect ACA compliance?

A Mid-Year Review Can Prevent Year-End Surprises

ACA affordability is not simply a year-end reporting exercise. Reviewing employee compensation, benefit contributions, and administrative processes during the year can help identify issues before they become compliance concerns. A proactive mid-year review helps employers maintain accurate records, support ongoing ACA compliance, and reduce the likelihood of unexpected issues during the next reporting season.