ACA Affordability Safe Harbors - Which One Should an Employer Use?

Since the inception of the Affordable Care Act, affordability in the context of healthcare premiums has a strict formula attached to it. Despite this, many Applicable Large Employers (ALEs) understandably still struggle with the nuances of affordability testing when it comes to non-calendar year plans, ever-changing contribution strategies, workforce demographics that shift on a yearly basis, and beyond.

Under IRC §4980H(b), there is this simple yet deceptive requirement: ALEs must offer at least one minimum value plan that is “affordable” to their full-time employees. An employee's lowest-cost contribution for self-only, minimum value coverage is considered affordable if it does not exceed a certain percentage of their household income that is adjusted annually for inflation.

• For plans that renew in 2026, this percentage is 9.96%
• For plans that renew in 2027, this percentage is 10.22%

Employers that do not offer affordable coverage to all of their full-time employees can receive §4980H(b) penalties if a full-time employee with no offer or an unaffordable offer enrolls in subsidized Marketplace coverage.

• the penalty is $417.50 per employee/month in 2026 and
• $472.50 per employee/month in 2027

These penalty amounts can be particularly helpful for employers that weigh the financial risk of offering unaffordable or no coverage to a percentage of their full-time employees against the cost of ensuring coverage is affordable for their entire full-time population.

Some employers strive to ensure that their coverage is affordable for everyone, while others are more comfortable with the risk of penalty exposure when it makes financial sense for their company.

Affordability Safe Harbors

As mentioned above, the ACA's affordability threshold is technically based on an employee's household income. But it is rare, if not impossible, for most employers to accurately pinpoint household income.

In recognition of this, the IRS has provided ALEs with three affordability safe harbors they can substitute for household income calculations:

• the W-2 safe harbor,
• the rate of pay safe harbor, or
• the federal poverty line (FPL) safe harbor

These safe harbors apply the same affordability percentage, but to the employee's income (W-2 and rate of pay safe harbor) or the applicable federal poverty line (FPL safe harbor). When used correctly, these safe harbors provide predictable, defensible compliance. When used incorrectly, they can unintentionally expose employers to potential §4980H(b) penalty liability.

Below is important information about the three ACA affordability safe harbors, noting the proper usage of each, pointing out some common pitfalls, and how to choose the right one for a specific workforce.

The W 2 Safe Harbor

The ACA W-2 safe harbor safe harbor can be described as “accurate but volatile.”

Affordability is measured as a percentage (9.96% for 2026 renewals; 10.22% for 2027 renewals) of the employee's Box 1 W-2 wages for the applicable calendar year. It is a great option for ALEs with:

• Salaried employees who have stable compensation
• Lots of hourly full-time employees who regularly work in excess of 30 hours per week (or receive significant amounts of overtime)
• Workforces that have predictable Box 1 W 2 outcomes

The “volatile” aspect of this safe harbor can be found in some of its pitfalls, including:

• Pre tax deductions, like medical insurance and retirement contributions, reduce Box 1 wages. This can lead to unanticipated unaffordable offers for employees who contribute a lot to their retirement plan or cover numerous dependents on their health plan
• It can be stressful for ALEs that will not know until the end of the year, when it is too late to fix, if a full-time employee on the cusp of affordability received an affordable offer
• If an hourly full-time employee's hours drop mid year, or there is a leave of absence, affordability can unexpectedly fail

The Rate of Pay Safe Harbor

This safe harbor is a favorite of many employers because it will calculate affordability using the applicable plan year's affordability percentage according to a full-time employee's hourly rate of pay or monthly salary:

• It is predictable
• It is not affected by unpaid leaves or a decrease in hours
• It is easy to administer across a large hourly worker population when work varies month to month

Just like the W-2 safe harbor, there are some drawbacks to this option:

• It does not account for overtime and bonuses the way the W-2 safe harbor does
• Affordability is calculated according to the lower of the employee's hourly rate of pay at the beginning of the plan year or the particular month, so mid-plan-year pay raises do not have an immediate impact on affordability
• Conversely, because of this rule, if the employee's hourly rate is reduced, affordability must be recalculated immediately
• This safe harbor cannot be used for tipped or commissioned employees

The Federal Poverty Line Safe Harbor

Administratively, the FPL safe harbor is the easiest to apply. An employee's monthly medical contribution is affordable if it does not exceed the applicable plan year's affordability percentage multiplied by the U.S. federal poverty line for a household of one.

Because the FPL is a fixed number, this safe harbor produces a single, uniform maximum employee contribution per plan year for all employees.

Employers use it because;

• It is the simplest of all safe harbors
• There are zero employee specific calculations
• It guarantees affordability for every full time employee
• It is the easiest to document and defend in the event of an IRS audit

It is also noted that even this simple safe harbor can encounter some snags such as:

• It often requires the employer to subsidize more of the premium than other safe harbors.
• Which FPL to use for the calculation can be a little confusing and partially depends on when the Department of Health and Human Services releases new numbers. The IRS requires employers to use the FPL in effect six months before the plan year begins, so calendar year plans typically need to use the previous year's FPL. Non-calendar year plans, however, can rely on the current year's FPL once their plan renews (as long as the new threshold has been released, of course)

So, the FPL safe harbor is best applied when;

• The employer wants absolute certainty of affordability
• The employer has a large low-wage workforce where other safe harbors might fail

All of this begs the question, “what is the right approach for an employer when choosing a safe harbor?”  The answer here is going to be unique to each employer and their goals.

Some employers want to guarantee their rates are affordable for every single full-time employee without having to monitor anything throughout the year, while others are more comfortable with balancing the risk of employer mandate tax penalty exposure against higher employee premiums that are easier for the company to handle.

The best advice is for an ALE to proactively decide what their affordability strategy is before open enrollment starts so they can

1. work with their broker to come up with a premium structure that meets their goals and
2. avoid affordability surprises during the plan year

Resources

• Amwins Benefits Compliance Library - Employer Shared Responsibility Provision
• Amwins Benefits - A Guide to 4980H Employer Mandate Requirements and Penalties

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