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Home ACA Reporting ACA Safe Harbors Prove Affordability and Prevent IRS Penalties

ACA Safe Harbors Prove Affordability and Prevent IRS Penalties

4 minute read
by Maxfield Marquardt
safe harbors

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

It’s an important question for Applicable Large Employers (ALEs), 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 ACA safe harbors that employers can use to help prove affordability: the Rate of Pay, W-2, and Federal Poverty Line (FPL).

Below we have outlined the three ACA safe harbors and provided general formulas to help you calculate affordable health plan contributions for your employees.

Rate of Pay Safe Harbor

The Rate of Pay Safe Harbor method 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 2024 tax year using the Rate of Pay Safe Harbor and hourly workers’ earnings, take the employee’s lowest hourly rate as of the first day of the coverage period. Next, 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 2024 affordability threshold, 8.39%. This will identify the maximum monthly contribution that the employee can pay to satisfy 2024 ACA affordability.

For example, ($20/hr x 130 hours) x 8.39% = maximum monthly contribution of $218.14.

In this particular situation, to claim the Rate of Pay Safe Harbor using hourly wages, the monthly contribution cannot exceed $218.14.

For a salaried employee, use 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 for 2024. Multiply the $2,000 monthly salary by the 8.39% affordability threshold for 2024. The result of $167.80 is the maximum monthly premium to meet the Rate of Pay Safe Harbor.

W-2 Safe Harbor

The W-2 Safe Harbor is a method for proving ACA affordability that involves using 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 8.39% 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 throughout the 2024 tax year. He received an offer of coverage on his first day of employment. 

So, here’s the calculation: $50,000 x 8.39% = $4,195.

Next, multiply $4,195 by the product of the number of months of coverage offered (9) by the total number of months in the year for partial coverage (9/12): $4,195 x (9/12) = $3,146.25.

$3,146.25 is the maximum annual amount that Jonny’s employer can make him pay for self-only coverage. To determine the monthly amount, divide the total by the number of months Johnny received coverage (9). This will get you $349.58 per month: $3,146.25 / 9 = $349.58.

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 2024 tax year, the 2023 mainland FPL for a household size of one is used.

To calculate the 2024 FPL Safe Harbor, take the 2023 mainland FPL for a household size of one, $14,580, and multiply it by 8.39%, the 2024 affordability threshold. Next, divide the product by 12:

Here’s the 2024 FPL Safe Harbor formula: ($14,580 x 8.39%) / 12 = $101.94

If the employee contribution for self-only coverage meets or is below $101.94 per month then the FPL Safe Harbor is met and the coverage offered is affordable for the 2024 tax year.

ALEs should note that the FPL Safe Harbor is the simplest to administer because contribution rates can be standardized across 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

Several considerations 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, like Trusaic, to ensure that the contributions identified on Line 15 of Form 1095-C are accurate.

Choosing an ACA safe harbor for proving affordability to the IRS can be difficult. Still, 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 to prove 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

ACA Safe Harbors Prove Affordability and Prevent IRS Penalties
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ACA Safe Harbors Prove Affordability and Prevent IRS Penalties
Organizations can prove their health plans are affordable to the IRS using one of the three ACA safe harbors. Read on to learn how.
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