ACA Explained: Determining Employee Affordability

We’ve talked about how important it is that the health insurance you offer your employees meets minimum essential coverage and value. One of the key components in making sure it meets these requirements is that it’s affordable.

The law is called the Affordable Care Act, after all.

So how exactly do you determine the affordability of the coverage you offer? Well, according to the IRS, it should cost the employee no more than 9.5% of their annual household income. But it’s unlikely that you know the household income of all of your employees – you’ve got a lot on your plate as it is. Luckily, you’ve come to the right blog!

The IRS allows three optional safe harbors for employers to use to determine coverage affordability to help keep in line with the employer shared responsibility provisions. You can choose to use one or more of the safe harbors for all of your employees, provided you do so on a uniform and consistent basis for all employees.

The Form W-2 Wages Safe Harbor
This form of safe harbor is based on the amount of wages paid to each employee. The employee’s wages are determined using Box 1 of that employee’s Form W-2.

The Rate of Pay Safe Harbor
The rate of pay is based on the employee’s rate of pay at the beginning of the coverage period. Adjustments are permitted for hourly employees if the rate of pay is decreased but not if it’s increased.