Under the Employer Mandate (delayed until 2015) of the Affordable Care Act (PPACA), large employers must offer their full-time employees (and their dependents) the opportunity to enroll in “Affordable” coverage.  Employers that offer their employees the opportunity to enroll in coverage will be penalized if the coverage is “unaffordable” or does not provide “Minimum Value,” and an employee receives a premium tax credit or cost-sharing reduction.

Coverage is deemed affordable if the employee’s required contribution for self-only coverage does not exceed 9.5% of the employee’s household income for the taxable year. If an employer offers multiple coverage options, the affordability test applies to the employer’s lowest-cost option that also meets the Minimum Value requirement (discussed below). For purposes of the Affordability test, household income is defined as the modified adjusted gross income of the employee and any members of the employee’s family (including a spouse and dependents) who are required to file an income tax return.

Employers generally will not know their employees’ household incomes. Therefore, the regulations allow employers to use one of three affordability safe harbors to determine whether an employer’s coverage satisfies the 9.5% affordability test.

These safe harbors do not apply when determining an employer’s assessable payment, nor do they affect an employee’s eligibility for a premium tax credit. The safe harbors are optional, and an employer may choose to use one or more of these safe harbors for all employees or for any category of employees as long as it does so on a uniform and consistent basis for all employees in a category. The three affordability safe harbors include:

  1. Form W-2 safe harbor;
  2. Rate of pay safe harbor; and
  3. Federal poverty line safe harbor

W-2 Safe Harbor

Under the Form W-2 safe harbor, an employer may determine affordability by reference to an employee’s wages from that employer. Wages for this purpose would be the total amount of wages required to be reported in Box 1 of Form W-2, Wage and Tax Statement.

Under this safe harbor, an employer will not be subject to a penalty with respect to a particular employee if (1) it offers full-time employees and their dependents the opportunity to enroll in coverage, and (2) the required employee contribution toward the self-only premium for coverage does not exceed 9.5% of the employee’s Form W-2 wages for the calendar year.

For an employee who was not a full-time employee for the entire calendar year, the employee’s Form W-2 wages are adjusted to reflect the period when the employee was offered coverage. These adjusted wages are then compared to the employee share of the premium during that period.

Rate of Pay Safe Harbor

According to the “rate of pay” safe harbor, an employer may take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan as of the beginning of the plan year and multiply this rate by 130 hours per month. The employee’s monthly contribution amount is affordable if it is equal to or lower than 9.5% of the computed monthly wages (applicable hourly pay rate multiplied by 130 hours).  For salaried employees, monthly salary is used instead of hourly salary multiplied by 130.

Federal Poverty Line Safe Harbor

Under the “federal poverty line” safe harbor, an employer may also determine affordability using a federal poverty line-based test. Specifically, under this safe harbor, employer-provided coverage offered to an employee is affordable if the employee’s cost for self-only coverage under the plan does not exceed 9.5% of the federal poverty line for a single individual.