The IRS has made available three affordability safe harbors that employers can use to help prove Affordable Care Act affordability when submitting annual ACA returns to the IRS.
Each safe harbor method looks at the employee contribution cost of the most affordable plan offered at the EE-only tier in order to help determine whether the most affordable plan offered to the employees is considered affordable by the IRS standards.
Ultimately, as the PEO completing the ACA filing on your behalf, Justworks will assign the Safe Harbor method for each unique FEIN or controlled group based on what we determine will pose the lowest compliance risk to you. If you wish to use a specific safe harbor, you can let us know, and we will ensure we file for you that way.
Coverage must be considered affordable by the IRS for at least 95% of an Applicable Large Employer’s (ALE’s) employees.
What are the 3 affordability safe harbors?
Federal Poverty Level
The Federal Poverty Level (FPL) safe harbor method measures affordability based on a percentage (determined by the IRS) of the annual FPL amount (which is determined by the Department of Health and Human Services (HHS).)
The IRS percentage will be multiplied by the HHS’s FPL amount and divided by 12 months to determine the maximum affordable monthly employee contribution cost to an employee for their health insurance coverage (medical only) for all benefits-eligible employees.
FPL is reported as the most commonly used safe harbor method as it allows you to meet the IRS' affordability requirements for all of your employees by offering at least 1 plan with EE contributions that are at or below the current annual requirements.
|
Calendar year (JW plan year) |
Prior year Federal Poverty Line (FPL) |
Affordability percentage |
Maximum monthly contribution |
|
2024 (2023-24 PY) |
$14,580 |
9.12% |
$110.81 |
|
2023 (2022-23 PY) |
$13,590 |
9.61% |
$108.83 |
|
2022 (2021-22 PY) |
$12,880 |
9.83% |
$105.51 |
Rate of Pay
The rate of pay safe harbor is determined on a monthly basis using an hourly employee’s lowest rate of pay or a non-hourly employee’s monthly salary. The IRS does not accept the rate of pay safe harbor for employees with tips or commissions as their entire compensation.
The same safe harbor method must be used to determine affordability for all employees at a company (or controlled group). Companies that have tip or commission-based EEs would not be able to utilize rate of pay.
To calculate affordability for hourly employees, the IRS assumes 130 hours worked per month no matter how many hours an employee actually worked. 130 hours is the minimum number to count as a full-time employee under the ACA (even if they are not marked as full-time in Justworks.)
You would multiply 130 by the employee's hourly wage. Then multiply that amount by the affordability percentage (in the chart above). The EE contribution cost per month for the cheapest health plan offered must be equal to or less than the final figure.
For salaried employees, you would multiply the affordability percentage by the employee's salary as of the first day of the coverage period. To test affordability using rate of pay, we’ll take the employee's monthly salary and multiply that by the IRS affordability percentage listed above in the FPL guidance.
Testing with rate of pay may expose your company to higher risk. If your company has a mix of higher & lower-earning individuals, and you don't offer a plan that’s IRS affordable for at least 95% of them, you may be at risk of facing an IRS penalty.
W-2
The W-2 Safe Harbor is a method for proving ACA affordability that involves the use of an employee’s W-2 Box 1, gross income.
To determine affordability, you would multiply the affordability percentage by the employee’s wages in Box 1 of the employee's W-2. This amount must be prorated to consider partial months worked during the year AND the number of months for which they were eligible for health insurance coverage.
If the annual cost to the employee for the least expensive health plan offered is equal to or lower than this amount, the IRS considers the coverage affordable.
Testing with the W-2 method may expose your company to higher risk. If your company has a mix of higher & lower-earning individuals, and you don't offer a plan that’s IRS affordable for at least 95% of them, you may be at risk of facing an IRS penalty.
The W2 safe harbor can be the trickiest safe harbor to use because it uses the employees' wages for the current year, which cannot be determined until the end of the year. This poses a challenge because you may not know if the coverage they offered was affordable until the end of the year.
Learn More
You can learn more about safe harbors on the IRS website and on Justworks Blog.