How to Calculate ACA Affordability Using Safe Harbors

The Affordable Care Act (ACA) includes provisions designed to ensure that employees have access to affordable health coverage. Applicable Large Employers (ALEs), generally those with 50 or more full-time equivalent employees, are required to offer affordable health coverage to their full-time employees and their dependents. Determining this affordability is a compliance obligation for employers, impacting potential penalties under the ACA’s employer shared responsibility provisions.

Defining the 2023 Affordability Standard

For the 2023 tax year, the ACA specifies a precise affordability percentage that employers must meet. Health coverage is considered affordable if the employee’s required contribution for the lowest-cost, self-only coverage offered by the employer does not exceed 9.12% of their household income. This percentage represents a threshold to prevent the cost of employer-sponsored coverage from becoming an excessive financial burden on employees.

The calculation uses the employee’s contribution for “self-only” coverage as the benchmark. Even if an employee chooses to enroll in family coverage, the affordability test is based solely on the cost for individual coverage. This standard exists because employers typically do not have access to an employee’s total household income, which includes income from other household members. The Internal Revenue Service (IRS) established this benchmark to provide a consistent and manageable standard for employers to apply.

Key Data for Affordability Calculation

Before assessing affordability using IRS safe harbors, specific data points must be gathered. The employee’s required contribution for the lowest-cost self-only coverage is a fundamental piece of information. This figure represents the monthly or annual amount an employee pays out-of-pocket for their individual health plan.

For the W-2 Wages Safe Harbor, an employer needs the employee’s W-2 Box 1 wages. This figure reflects the employee’s taxable wages as reported on their annual W-2 form. It is important to use the wages for the calendar year corresponding to the plan year being tested for affordability.

The Rate of Pay Safe Harbor requires the employee’s hourly rate of pay. For hourly employees, this is their direct hourly wage. For salaried employees, their monthly salary would need to be converted into an hourly equivalent based on a standard work schedule.

The Federal Poverty Line (FPL) Safe Harbor utilizes the applicable FPL for the relevant year. For 2023, the FPL for a single individual in the 48 contiguous states and the District of Columbia was $13,590. Employers can find the official updated FPL figures annually published by the Department of Health and Human Services (HHS).

Applying the Affordability Safe Harbors

Employers can use one of three IRS-recognized safe harbors to determine if their health coverage meets the affordability standard, as they generally lack knowledge of an employee’s household income. These safe harbors are the W-2 Wages Safe Harbor, the Rate of Pay Safe Harbor, and the Federal Poverty Line (FPL) Safe Harbor. Each safe harbor provides a method to calculate affordability based on readily available employer data.

W-2 Wages Safe Harbor

The W-2 Wages Safe Harbor compares the employee’s required contribution to their taxable wages from Box 1 of their W-2 form. To apply this, divide the employee’s annual required contribution for self-only coverage by their W-2 Box 1 wages for the calendar year. If this percentage is at or below the 9.12% affordability threshold for 2023, the coverage is considered affordable under this safe harbor. For example, if an employee’s annual W-2 Box 1 wages are $30,000 and their annual contribution for self-only coverage is $2,700, the calculation is ($2,700 / $30,000) 100% = 9.00%. Since 9.00% is less than 9.12%, the coverage is affordable.

Rate of Pay Safe Harbor

The Rate of Pay Safe Harbor is particularly useful for hourly employees. This method assumes an employee works 130 hours per month. To calculate affordability, multiply the employee’s hourly rate of pay by 130 hours, then multiply that product by 9.12% to determine the maximum affordable monthly contribution. If the employee’s actual monthly contribution for self-only coverage is at or below this amount, the coverage is affordable. For instance, if an employee earns $15 per hour, their assumed monthly income is $15 130 hours = $1,950. The maximum affordable monthly contribution would be $1,950 0.0912 = $177.84. If the employee’s monthly contribution is $170, it meets the affordability standard.

Federal Poverty Line Safe Harbor

The Federal Poverty Line Safe Harbor allows employers to use the FPL for a single individual as a proxy for employee household income. For 2023, the FPL for a single individual was $13,590. To apply this safe harbor, multiply the applicable FPL by 9.12% to determine the maximum annual employee contribution. For 2023, this would be $13,590 0.0912 = $1,239.41 annually, or approximately $103.28 per month. If the employee’s required contribution for the lowest-cost self-only coverage is at or below this amount, the coverage is considered affordable.