Why the Federal Poverty Line Safe Harbor May Be the Simplest ACA Affordability Strategy

Applicable Large Employers (ALEs) subject to the Affordable Care Act’s employer shared responsibility provisions must consider whether the health coverage they offer to full-time employees is affordable. The challenge is that ACA affordability is generally based on household income, information employers typically do not know.

To address this problem, the IRS permits employers to use three affordability safe harbors: the Form W-2 safe harbor, the rate of pay safe harbor, and the federal poverty line (FPL) safe harbor.

While each can be useful, the FPL safe harbor is often the simplest and most predictable option for employers that can structure their employee contributions to meet it.

How the FPL Safe Harbor Works

Under the FPL safe harbor, an employer does not need to determine affordability separately based on each employee’s compensation. Instead, affordability is based on the federal poverty line for a single individual and the ACA affordability percentage applicable to the plan year.

For plan years beginning in 2026, the ACA affordability percentage is 9.96%.

If the employee’s required contribution for the employer’s lowest-cost self-only coverage that provides minimum value does not exceed the applicable FPL affordability threshold, the coverage is deemed affordable for purposes of the ACA employer shared responsibility provisions.

This provides employers with a uniform affordability standard that can generally be established before the plan year begins.

Why FPL Can Be Easier Than the W-2 Safe Harbor

The Form W-2 safe harbor is based on the employee’s Box 1 Form W-2 wages from the employer. It does not require the employer to know an employee’s total family or household income.

However, W-2 wages can still present administrative challenges. Box 1 wages vary by employee and can be affected by such factors as partial-year employment, unpaid leave, salary reductions and other compensation-related circumstances. Final Box 1 wages also are not known until after the end of the calendar year.

The FPL safe harbor avoids much of this employee-by-employee variability. The affordability threshold is based on a published federal amount rather than each employee’s individual compensation.

What About the Rate of Pay Safe Harbor?

The rate of pay safe harbor can also provide a practical method for establishing affordability. However, it still relies on employee-specific compensation information.

For hourly employees, affordability generally depends on the employee’s hourly rate of pay. Salaried employees are subject to a different calculation based on monthly salary, and compensation changes may need to be considered under the applicable rules.

By contrast, an employer using the FPL safe harbor can generally apply the same maximum employee contribution threshold regardless of how much an individual employee earns.

A Significant Reporting Advantage: Code 1A

The FPL approach can also provide an important Form 1095-C reporting advantage.

An employer may be able to report Code 1A on Line 14 when it makes a “Qualifying Offer.” A Qualifying Offer generally requires an offer of minimum essential coverage providing minimum value to the full-time employee, with the employee contribution for self-only coverage at or below the applicable FPL affordability threshold, as well as an offer of minimum essential coverage to the employee’s spouse and dependents.

When Code 1A applies, Line 15, which otherwise reports the employee required contribution, is left blank. An applicable Line 16 code is generally not required for a month for which Code 1A is reported because a Qualifying Offer is, by definition, treated as falling within an affordability safe harbor.

This can simplify ACA reporting and reduce the number of employee-specific affordability calculations and reporting codes that must be administered.

Why Simplicity Matters

Employers sometimes focus on selecting the safe harbor that permits the highest employee contribution. But there is also value in considering the administrative consequences of that decision.

The FPL safe harbor provides an objective, published affordability threshold. When properly implemented, employers do not have to substantiate affordability based on different W-2 wages or rates of pay for individual employees. It can also make it easier to establish contribution rates before the plan year begins and to consistently administer affordability throughout the year.

That consistency can reduce the opportunity for affordability calculation and reporting errors.

This does not mean that using the FPL safe harbor prevents an IRS inquiry or eliminates an employer’s ACA compliance responsibilities. Rather, it can provide a straightforward method for demonstrating how affordability was established if an employer’s ACA reporting is later questioned.

The Tradeoff

The FPL safe harbor is not necessarily the right choice for every employer.

Because it uses the federal poverty line rather than an employee’s actual compensation, it will generally establish a lower maximum employee contribution than the W-2 or rate of pay safe harbors for many employees. As a result, the employer may need to contribute more toward the cost of coverage.

Employers should therefore consider both the financial and administrative consequences when selecting an affordability strategy.

For employers that can accommodate the required contribution level, however, the FPL safe harbor offers significant advantages: a uniform affordability threshold, less reliance on employee-specific compensation data, greater predictability, and potentially simpler Form 1095-C reporting.

For many employers, those advantages make the FPL safe harbor worth serious consideration when designing their ACA affordability strategy.