The best way for an employer to fully protect itself from a 4980H penalty is to offer coverage that provides minimum value at an affordable price to all of its full-time employees and their dependents. This article explores how an employer can ensure that its offer of coverage will be deemed affordable.
An individual is only eligible for a premium tax credit - the trigger mechanism for the employer mandate penalties under the Affordable Care Act (ACA) - if the individual is, among other things, not eligible for minimum essential coverage under an eligible employer-sponsored plan that provides minimum value and is affordable. For premium tax credit purposes an employer’s coverage is considered affordable if the employee’s contribution level for self-only coverage does not exceed 9.5 percent of the employee’s household income. This 9.5 percent number is indexed for future years in the premium tax credit portion of the law. In 2016 the indexed number is 9.66 percent.
If an employee has a spouse or dependents, the income of the spouse and dependents are typically aggregated together when determining the employee’s household income. For example, if an employee has a spouse and two children, the employee’s household income will include the modified adjusted gross income of all four individuals.
The government recognized employers usually would not be able to determine an employee’s household income as a spouse’s or dependent’s income in addition to the employee’s income from other jobs and investments will not be known by the employer. To assist employers with this problem the government created three safe harbor provisions. If an employer satisfies the requirements of one of the safe harbors, the offer of coverage will be viewed as affordable for employer mandate purposes regardless of whether it is in fact affordable based on the employee’s household income.
To be eligible to use one of the affordability safe harbors an employer must offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage and the minimum essential coverage must provide minimum value with respect to self-only coverage offered to the employee. If these conditions are satisfied, an employer may choose to use one or more of the safe harbors for all of its employees or any reasonable category of employees. A reasonable category of employees includes employees classified by job categories, nature of compensation (hourly or salaried), geographic location, or similar bona fide business criteria. A list of employees by name and which safe harbor each employee will use will not be considered a reasonable category.
Form W-2 Safe Harbor
The first affordability safe harbor an employer may utilize is referred to as the form w-2 safe harbor. Under the form w-2 safe harbor an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.66 percent of that employee’s form w-2 wages (box 1 of the form w-2) from the employer for the calendar year. In order to utilize the form w-2 safe harbor the employee’s required contribution must remain a consistent amount or percentage of all form w-2 wages during the calendar year (or during the plan year for plans with non-calendar year plan years). At the end of the year the employer determines this safe harbor on an employee-by-employee basis.
If an employee is not offered coverage for an entire year, the form w-2 wages are adjusted using the formula discussed below. In this scenario an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.66 percent of the adjusted amount of the form w-2 wages.
The form w-2 wages are multiplied by a fraction equal to the number of months for which coverage was offered over the number of months in the employee’s period of employment with the employer during the year. For the purposes of this equation if coverage is offered for one day during a calendar month or if the employee is employed for at least one day during the calendar month, the entire calendar month is counted in determining the applicable fraction
Rate of Pay Safe Harbor
The second affordability safe harbor is the rate of pay safe harbor. The rate of pay safe harbor can be broken into two tests, one test for hourly employees and another test for salaried employees. For hourly employees an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.66 percent of the product of the employee’s hourly rate of pay and 130 hours. When determining the employee’s hourly rate of pay use the lower of the employee’s hourly rate of pay on the first day of the coverage period or the employee’s lowest hourly rate of pay during the calendar month.
The chart below shows how the affordability requirement would work for various pay scales for hourly employees:
Rate of Pay Safe Harbor – Hourly Employees
| Hourly Rate of Pay | Monthly Pay for 130 Hours | Maximum Amount of Employee Monthly Contributions |
|---|---|---|
| $8 | $1,040 | $100.46 |
| $10 | $1,300 | $125.58 |
| $12 | $1,560 | $150.70 |
| $14 | $1,820 | $175.81 |
For salaried employees an employer’s offer will be deemed affordable if the employee’s required contribution for the month for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.66 percent of the employee’s monthly salary. This safe harbor cannot be used if the employee’s monthly salary is reduced. An employer may use any reasonable method for converting payroll periods to monthly salary.
The chart below shows how the affordability requirement would work for various pay scales for salaried employees:
Rate of Pay Safe Harbor – Salaried Employees
| Yearly Salary | Monthly Salary | Maximum Amount of Employee Monthly Contributions |
|---|---|---|
| $20,000 | $1,666.67 | $161.00 |
| $25,000 | $2,083.33 | $201.25 |
| $30,000 | $2,500.00 | $241.50 |
| $35,000 | $2,916.67 | $281.75 |
Federal Poverty Line Safe Harbor
The final affordability safe harbor is the federal poverty line safe harbor. Under the federal poverty line safe harbor an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.66 percent of the monthly Federal Poverty Line (FPL) for a single individual. An employer should use the Federal Poverty Line for the State the employee is employed.
The charts below illustrate the Federal Poverty Line Safe Harbor for 2016:
Federal Poverty Line Safe Harbor 2016
| Yearly FPL | Monthly FPL | Maximum Amount of Employee Monthly Contributions | |
|---|---|---|---|
| US Mainland | $11,770 | $980.83 | $94.75 |
| Hawaii | $13,550 | $1,129.17 | $109.08 |
| Alaska | $14,720 | $1,226.67 | $118.50 |
So long as one of the three safe harbors is met, the employer will have satisfied the affordability prong of an offer of coverage even if an employee ends up receiving a premium tax credit. It is important to document what affordability safe harbor an employer is utilizing for its employees or group of employees.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorney's P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the newly created Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
The information contained on this site is not, nor is it intended to be, legal advice. An attorney should be consulted for advice regarding your situation. Copyright © 2016 by Accord Systems, LLC. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement.