The ACA Times


  Show menu
  • Home
  • Articles
  • Get to Know the ACA
  • ACA – Frequently Asked Questions
  • Resources
  • Meet the Editors
  • Trusaic
  • Contact Us
  • Terms of Service
  • Privacy Notice
  
  • Home
  • ACA Compliance
  • Safe Harbors Prove ACA Affordability and Prevent Penalties (UPDATE)

Articles

Safe Harbors Prove ACA Affordability and Prevent Penalties (UPDATE)

March 24, 2022 Joanna Kim-Brunetti ACA Compliance, Affordable Care Act
Safe Harbors Prove ACA Affordability and Prevent Penalties (UPDATE)

How do employers prove to the IRS that the healthcare plans they are offering to their workforce are affordable under the ACA?

It’s an important question for Applicable Large Employers (ALEs) or employers with 50 or more full-time and full-time equivalent employees. That’s because providing affordability is a critical piece for complying with the ACA’s Employer Mandate and failing to do so could result in penalties via IRC Section 4980H(b), currently being issued by the IRS via Letter 226J.

Fortunately, the IRS has made available three affordability safe harbors that employers can use to help prove ACA affordability. And with the final 2021 ACA reporting deadline approaching quickly, now is the time to ensure you’re correctly applying and documenting the safe harbors in your filings.

To begin, the three safe harbors employers can use when proving ACA affordability to the IRS are the Rate of Pay, W-2, and Federal Poverty Line (FPL). 

Below we have outlined the three safe harbors and provided general formulas to help you calculate ACA affordability accurately.

Rate of Pay Safe Harbor

The Rate of Pay Safe Harbor is a method for proving ACA affordability that is based on an employee’s hourly rate or monthly salary rate. Best practices suggest performing the safe harbor calculation for each full-time employee monthly.

To calculate ACA affordability for the 2022 tax year under the Rate of Pay Safe Harbor using hourly workers’ earnings, take the employee’s lowest hourly rate as of the first day of the coverage period and multiply it by 130, the minimum total of hours an employee must work on average to be ACA full-time.

Take that product and multiply it by the 2022 affordability threshold, 9.61%. This will identify the maximum monthly premium that the employee can pay to satisfy 2022 ACA affordability. 

Take, for example, $20/hr x 130 hours x 9.61% = maximum monthly premium of $249.86. 

For this particular situation, to claim the Rate of Pay Safe Harbor using hourly wages, the monthly contribution cannot exceed $249.86.

For a salaried employee, take the monthly salary as of the first date of the coverage period and multiply it by the appropriate affordability percentage for the year. 

Here’s an example: $2,000 monthly salary x 9.61% affordability threshold for 2022 = maximum monthly premium of $192.20 to claim the Rate of Pay Safe Harbor. 

W-2 Safe Harbor

The W-2 Safe Harbor is a method for proving ACA affordability that involves the use of an employee’s W-2 Box 1, gross income. To calculate ACA affordability using the W-2 Safe Harbor, use the following formula: W-2 Box 1 Wages multiplied by 9.61% with an adjustment for partial year coverage. 

Here’s an example: Jonny Oswald earns an annual salary of $50,000 as a manager at Parker’s Pizza. Jonny worked at Parker’s Pizza for 9 out of the 12 months during the 2022 tax year. He received an offer of coverage on his first day of employment. So here’s the calculation: $50,000 x 9.61% = $4,805. 

Next, multiply $4,805 by the product of the number of months coverage offered (9) by the total number of months in the year for partial coverage (9/12). This gives you $3,603.75, which is the maximum annual amount that Jonny’s employer can make him pay for self-only coverage. To find out the amount per month, divide the total by the number of months Johnny received coverage (9). This will get you $400.42 per month.

FPL Safe Harbor

The Federal Poverty Line (FPL) Safe Harbor is a method for proving ACA affordability that is based on an employee’s annual household income, which is a function of that employee’s household size and is adjusted on an annual basis. 

Each year, the Department of Health and Human Services (HHS) publishes the annual FPL. For the 2022 tax year, the 2021 mainland FPL for a household size of one is used. 

To calculate the FPL Safe Harbor, take the 2021 mainland FPL for a household size of one, $12,880, and multiply it by 9.61%. Next, divide the product by 12. 

Here’s the 2022 FPL Safe Harbor formula: $12,880 x 9.61% / 12 = $103.15. 

If the employee contribution for self-only coverage meets or is below $103.15, then the FPL Safe Harbor is met and the coverage offered is affordable for the 2022 tax year.

ALEs should note that the FPL Safe Harbor is arguably the simplest to administer because contribution rates can be standardized across entire employee groups. However, using the FPL Safe Harbor for providing ACA affordability may cost ALEs more due to the monthly premium contribution amount for employees being lower than calculating individual contributions on a per-employee basis.

Plan nuances that may impact affordability

There are a number of considerations that can affect the affordability of a plan. Opt-out payments, wellness plans, flex credits, and Health Reimbursement Arrangements (HRAs) are some of the more common considerations that may either increase or decrease the affordability of an employer-sponsored health plan. 

If your organization has components like these, you may want to seek an outside expert to help you make sure that the contributions identified on Line 15 of Form 1095-C are accurate.

Choosing an IRS safe harbor for proving ACA affordability can be difficult, but employers should know that they do not need to apply one safe harbor across their entire workforce and should choose what makes the most sense for their organization.

If you’re interested in learning more about ACA safe harbors, including real-world examples, and which safe harbor method may be best for your organization, download the Safe Harbor Playbook for Calculating ACA Affordability.

Implementing safe harbors when administering your health plan is one thing. Communicating this information to the IRS is another. In fact, if you successfully set up your affordability safe harbors for an applicable tax year but incorrectly code them on the 1095-Cs, you could be subject to IRS penalty assessments and the onus will fall on you for proving otherwise. 

To learn more about coding ACA affordability on the 1095-C forms, download the Employer’s Guide to Coding ACA Form 1095-C below:

Download Employer's 1095-C Guide

Implementing safe harbors when administering your health plan is one thing and communicating this information to the IRS is another. Minimize risk, avoid penalties, and navigate the complexities of the ACA with full-service support from Trusaic.

Summary
2021 ACA Affordability Safe Harbors to Help Avoid IRS Penalties
Article Name
2021 ACA Affordability Safe Harbors to Help Avoid IRS Penalties
Description
Employers should read up on ACA safe harbors for proving affordability to the IRS. Accurately claiming ACA safe harbors can help organizations minimize IRS penalty risk.
Author
Joanna Kim-Brunetti
Publisher Name
The ACA Times
Publisher Logo
The ACA Times
Short URL of this page: https://acatimes.com/ert
Joanna Kim-Brunetti

Joanna Kim-Brunetti

Joanna Kim-Brunetti, Esq., is Chief Legal Officer for Trusaic.

View more by Joanna Kim-Brunetti

Related tags to article

ACA ComplianceACA ReportingAffordable Care ActApplicable Large EmployersEmployer MandateFederal Poverty Line (FPL)Form 1095-CHealth Care CoverageInternal Revenue CodeIRSLetter 226JMinimum ValuePenaltiesRegulationsSafe HarborsSection 4980HSection 6056W-2 Safe Harbor
Related Articles New York Pay Transparency Law Delayed to November New York Pay Transparency Law Delayed to November
Related Articles Takeaways From the 2021 UK Gender Pay Gap Reporting Results Takeaways From the 2021 UK Gender Pay Gap Reporting Results
Related Articles LinkedIn Settlement Demonstrates Need For Accurate Pay Equity Audits LinkedIn Settlement Demonstrates Need For Accurate Pay Equity Audits
Related Articles Administration Predicts Lower ACA Enrollment by Robert Sheen  •  
Related Articles Feds Close “Skinny” Health Plan Loophole by Robert Sheen  •  
Related Articles IRS Eases Rules on Hardship Exemptions by Robert Sheen  •  
ACA Essential Guide for Employers 2021
Subscribe

Popular Posts

  • IRS Proposed Ruling Could Change ACA Affordability
  • ACA Penalty Letter 226J on The Rise
  • New PTC Data is Cause For Concern For Employers
  • ACA Enrollment Reaches 35 Million Signups

Trending Topics

  • Regulations
    (91)
  • Legislation
    (47)
  • Editorials
    (19)
  • ACA Compliance
    (167)
  • Tax Filings
    (19)
  • Applicable Large Employer (ALE)
    (13)
  • Penalties
    (18)
  • IRS
    (87)
  • Health Insurance Marketplace
    (28)
  • Polls/Surveys
    (18)
  • Health Care Reform
    (22)
  • Reporting
    (22)
  • IRS 226J/226-J
    (28)

Categories


Brought to you by Trusaic

 

Twitter Facebook

Downloads

The ACA 101 Toolkit

The Essential Guide to the ACA

Letter 226J Infographic

5 Common ACA Compliance Mistakes

Triangle of Trust

Articles

IRS Affordability Safe Harbors Help Avoid ACA Penalties

Calculating FT and FTE Employees

The ACA Monthly Measurement Method: A Few Examples

The IRS’s 1095 Forms for ACA Explained

Incorrect ITINs Will Cause Havoc With ACA Compliance

Knowledge Center

Get to know the ACA

Get to know Letter 226J

Webinar: What triggers an ACA penalty

Trusaic News

Our Story


FEATURED IN

Human Resources Today
Connected Health Pulse

© 2021 Copyright Trusaic - All Rights reserved.

Close Window

Loading, Please Wait!

This may take a second or two. Loading, Please Wait!