How to Calculate ACA Affordability: 2024 Rate of Pay

The Affordable Care Act (ACA) requires Applicable Large Employers (ALEs) to offer affordable health coverage to their full-time employees and their dependents. Understanding what constitutes “affordable” coverage is a primary concern for businesses, as non-compliance can lead to substantial penalties. This ensures employees have access to health plans that meet specific cost thresholds.

ACA Affordability Requirement

To be affordable under the ACA, the employee’s required contribution for the lowest-cost, self-only coverage option offered by the employer must not exceed a certain percentage of their household income. The Internal Revenue Service (IRS) annually adjusts this percentage. For plan years beginning in 2024, the affordability percentage is set at 8.39%.

Employers typically do not have access to an employee’s total household income, which can include earnings from other sources or spouses. To address this challenge, the IRS provides specific safe harbors. These safe harbors allow employers to determine affordability based on readily available information, offering a standardized approach to compliance. While several safe harbors exist, they provide employers with a reliable method to assess affordability without needing an employee’s complete financial picture.

The Rate of Pay Safe Harbor

The Rate of Pay Safe Harbor is a method employers can use to determine if their health coverage meets the ACA’s affordability standard. This safe harbor allows employers to base affordability calculations on an employee’s specific rate of pay at the beginning of the coverage period. It is useful for employers seeking a consistent and predictable method to ensure compliance.

For hourly employees, the “rate of pay” for this calculation is the employee’s lowest hourly rate of pay, multiplied by 130 hours per month. This fixed hourly multiplier is used regardless of the actual hours an employee works. For salaried employees, the “rate of pay” is their monthly salary.

This safe harbor can be applied under specific conditions. If an hourly employee’s rate of pay is reduced during the year, the employer may still use this safe harbor by applying the lower rate of pay for that calendar month. However, for salaried employees, this safe harbor generally cannot be used if their monthly salary is reduced during the year, as the calculation relies on a consistent monthly salary.

Performing the Rate of Pay Calculation

Calculating affordability using the Rate of Pay Safe Harbor involves a step-by-step process. This method ensures the employee’s contribution for health coverage aligns with the specified affordability percentage for the year. The calculation focuses on the lowest-cost, self-only coverage option available to the employee.

First, determine the employee’s applicable monthly income for this safe harbor. For an hourly employee, this involves multiplying their lowest hourly rate of pay by 130 hours. For example, if an hourly employee’s lowest rate is $15 per hour, their monthly income for this calculation would be $15 x 130 hours = $1,950. For a salaried employee, this is simply their monthly salary, such as $3,000 per month.

Next, this calculated monthly income is multiplied by the 2024 affordability percentage, which is 8.39%. For the hourly employee, the maximum affordable monthly contribution would be $1,950 x 0.0839 = $163.61. For the salaried employee, it would be $3,000 x 0.0839 = $251.70. This result represents the maximum amount the employee can be required to contribute monthly for their health coverage to be considered affordable under this safe harbor.

Finally, the employer compares this calculated maximum affordable contribution to the actual required employee contribution for the lowest-cost, self-only coverage. If the employee’s actual required contribution is equal to or less than the calculated maximum, the coverage is deemed affordable under the Rate of Pay Safe Harbor. This comparison ensures the employee’s share of the premium does not exceed the IRS-defined limit.

Ongoing Compliance and Recordkeeping

Maintaining compliance with ACA affordability requirements necessitates diligent recordkeeping and periodic review. Employers must keep precise records of their affordability calculations, offers of coverage made to employees, and the actual employee contributions for health plans. This documentation demonstrates adherence to IRS regulations, particularly in an audit.

It is important to monitor employee wages or salaries throughout the year, especially if the Rate of Pay Safe Harbor is used. While the safe harbor allows for using the lowest hourly rate for a given month, significant changes in an employee’s pay structure could impact future affordability assessments. Employers should establish internal processes to track these changes and reassess affordability as needed. Proper documentation supports compliance efforts and provides a clear audit trail for all affordability determinations.