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Under the Affordable Care Act (ACA), applicable large employers (ALEs) are required to offer affordable health coverage to their full-time employees or potentially face penalties. To determine if the health coverage they offer is considered “affordable,” employers can rely on one of three IRS safe harbor options. It is important for employers to review these safe harbor options each year to ensure compliance and adjust the cost of coverage if needed. Additionally, understanding how to correctly report this information on Form 1095-C is necessary to avoid errors that could trigger penalties.

Understanding the ACA Safe Harbor Options

The ACA specifies that health coverage is affordable if an employee’s share of the premium for the lowest-cost self-only plan does not exceed a certain percentage of their household income. However, since most employers do not have access to employees' household incomes, the IRS provides three safe harbor methods to help employers determine affordability using information readily available to them:

1. Federal Poverty Line (FPL) Safe Harbor: Under this method, coverage is deemed affordable if the employee’s premium does not exceed a specified percentage of the federal poverty line for a single individual. The FPL safe harbor is widely used because it offers a predictable, stable threshold for affordability. For employers, this option provides a straightforward way to ensure compliance, especially when coverage cost adjustments align with annual FPL changes.
2. Rate of Pay Safe Harbor: This option allows employers to base affordability on an employee’s hourly wage rate (multiplied by 130 hours) or monthly salary. If the employee’s required contribution for coverage remains within the designated percentage of their rate of pay, it is considered affordable. This safe harbor is particularly beneficial for hourly employees, as it directly relates to their earnings and provides flexibility to adjust contributions as needed.
3. W-2 Safe Harbor: The W-2 safe harbor calculates affordability based on each employee's Box 1 W-2 wages. Though this method can be more complex, as it requires data from the employee’s year-end W-2, it allows for adjustments based on the actual annual income. For employers with variable-hour employees or those with fluctuating earnings, this safe harbor can be a practical option, albeit with a bit more administrative effort.

Annual Review and Adjustments for Compliance

Each year, the affordability percentage threshold set by the ACA may change, and the federal poverty line is also adjusted. Employers should assess their current health plans annually and adjust their contribution levels to ensure they remain affordable under the chosen safe harbor method. Failing to adjust coverage costs to reflect these annual changes can result in non-compliance, leading to costly penalties for the employer.

Moreover, it is important for employers to correctly report the appropriate affordability safe harbor code on Line 16 of Form 1095-C. This form is required by the IRS to document the health coverage offered to employees. Employers must report which safe harbor method was used to determine affordability, as this substantiates compliance and helps avoid unnecessary penalties. Accurate reporting on Form 1095-C is particularly important, as incorrect or missing information could trigger audits or compliance checks by the IRS.

The Importance of Data Review and Accuracy

Ensuring accurate data is necessary when using any safe harbor method. Employers should routinely verify that their employee wage data, plan cost structures, and contribution amounts align with the selected safe harbor’s requirements. Errors in data entry or calculation can lead to inaccuracies on Form 1095-C, potentially resulting in fines or complications during IRS audits.

Action Steps for Employers

To ensure ACA compliance and accurate reporting, HR professionals should:

1. Review and select the safe harbor method that best fits their workforce and benefits structure.
2. Confirm that employee contributions align with the affordability threshold under the chosen safe harbor, adjusting as necessary.
3. Accurately complete Line 16 on Form 1095-C with the correct safe harbor code, reflecting the method used.
4. Regularly audit data for accuracy and ensure consistent communication with benefits administrators.

By proactively reviewing safe harbor options, staying up-to-date with annual changes, and accurately reporting on Form 1095-C, employers can confidently offer affordable health coverage and fulfill their ACA obligations.

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