Understanding Affordability Safe Harbors to Avoid ACA Penalties

Ensuring compliance with the Affordable Care Act (ACA) is essential for protecting both employers and employees. One key aspect is maintaining the affordability of health coverage. The ACA mandates that applicable large employers (ALEs) must offer affordable, minimum-value health coverage to full-time employees and dependents to avoid penalties. Here's a guide to understanding the adjusted affordability percentages and the safe harbors provided by the IRS.

Adjusted Affordability Percentage

The affordability contribution percentage is adjusted annually. For plan years beginning in 2024, the percentage is set at 8.39%, down from 9.12% in 2023. This adjustment reflects the rates of health coverage premium growth relative to income growth.

Affordability Safe Harbors

The IRS provides three optional safe harbors for ALEs to determine the affordability of their health plans:

1. Form W-2 Safe Harbor
2. Rate-of-Pay Safe Harbor
3. Federal Poverty Line (FPL) Safe Harbor

These safe harbors allow ALEs to assess affordability based on accessible information rather than employees' household income, which is typically unknown.

1. Form W-2 Safe Harbor:

• Affordability is determined based on an employee’s W-2 wages.
• It’s less predictable due to wage fluctuations during the year.
• Best for employees with predictable annual compensation.

2. Rate-of-Pay Safe Harbor:

• Uses an employee's hourly rate multiplied by 130 hours per month, or the monthly salary for salaried employees.
• Provides predictability and is useful for employers with many hourly employees.
• May not maximize employee contributions if employees work more than 130 hours per month regularly.

3. FPL Safe Harbor:

• Uses the federal poverty line for a single individual.
• Offers the most predictable method.
• Typically requires a higher employer contribution.

Applying Safe Harbors

Employers can choose one or more safe harbors for all employees or specific categories, ensuring consistency and uniformity. Categories can include job types, compensation nature (salaried or hourly), geographic location, etc. It’s crucial to select a safe harbor that aligns with the workforce's nature and predictability of wages.

For example, using the Form W-2 safe harbor for an employee with W-2 wages of $60,000 in 2024 means the maximum monthly premium should not exceed $419.50. On the other hand, for hourly employees, if an employee earns $15 per hour, the maximum monthly premium under the rate-of-pay safe harbor would be $163.61.

Conclusion

Selecting the appropriate safe harbor is essential for compliance and financial planning. It helps ALEs provide affordable health coverage, avoiding ACA penalties and ensuring employees receive necessary benefits. Stay informed about the annual adjustments and carefully assess which safe harbor best suits your organization's structure and employee demographics.

For further details and resources, refer to:

• IRS Final Regulations on ACA’s Pay-or-Play Rules
• IRS Revenue Procedure 2023-29

Feel free to reach out if you need assistance navigating these regulations or selecting the best safe harbor for your organization.

This newsletter aims to provide an overview of the ACA affordability safe harbors and their application. For personalized advice, consider consulting with legal counsel or a benefits consultant.