Reporting, ACA

The Crucial Role of ACA Tracking & Reporting: Affordability Safe Harbors

September 11, 2023

Many employers, including Applicable Large Employers (ALEs), strive to offer affordable health insurance coverage that ensures employee well-being, compliance with the Affordable Care Act (ACA), and financial stability for the organization itself. Calculating affordability can be a difficult and complicated process, even when using IRS-approved safe harbors to avoid “play-or-pay” penalties. This is especially true as affordability contribution percentages shift based on inflation each year, and each safe harbor option uses unique calculation methods that are often best suited to particular categories of employees (hourly, salaried, and otherwise).

ACA tracking and reporting is crucial for HR compliance, but also for overall business health. Payday Payroll's services provide robust and precise tracking, reporting, and compliance measures that not only ensure adherence to ACA regulations but also positively impact employee benefits and retirement planning. Effective management of affordability safe harbors can lead to improved financial stability for both businesses and their employees.

In this article, we’ll guide you through ACA compliance requirements, the calculation methods for each affordability safe harbor, and how to formulate a benefits and ACA tracking strategy that supports your organization and employees.

Understanding ACA and Affordability Safe Harbors

Within the Affordable Care Act (ACA), employer shared responsibility provisions dictate that ALEs must offer health insurance coverage to full-time employees and their dependents. This coverage must be “affordable,” provide “minimum value,” and ALEs that fail to meet these criteria risk receiving an employer shared responsibility penalty.

A health insurance plan is considered “affordable” as long as the employee portion of the self-only premium does not exceed approximately 9.5% of the employee’s household income in a given tax year. Only an ALE’s lowest-cost plan needs to meet this criterion. Other offered health insurance plans can legally exceed this self-only premium percentage as long as the lowest-cost plan meets this standard. Employers should also note that the affordability contribution percentage is updated each year based on inflation. In 2023, the percentage was lowered by an unprecedented amount: from 9.61% in 2022 to 9.12% for 2023.

Employers are unable to legally acquire comprehensive information about an employee’s total household income (e.g. their known salary + the additional income of a spouse, family member, and/or an employee’s additional pay from self-employment or another organization). In order to help ALEs calculate affordability without this information on hand, the IRS offers multiple affordability safe harbors, including the W-2 safe harbor; the federal poverty level (FPL) safe harbor; and the rate of pay safe harbor. In the next section, we’ll outline the pros and cons of each optional safe harbor to help you make a determination regarding which is best for your organization.

The Significance of ACA Tracking and Reporting

We strongly encourage ALEs to utilize IRS-approved safe harbors to determine affordability related to health insurance coverage for employees and dependents. This is especially important in the event that the IRS issues Letter 226J (a penalty letter) for noncompliance, because it allows an employer to easily prove that the coverage offered is affordable based on IRS standards when an employee does not elect to enroll in employer-sponsored coverage.

When selecting one of the three IRS affordability safe harbors, it’s essential to remember that any choice (and implementation) should be guided by the specifics of your organization: its workforce composition (number of employees, employee classifications), as well as its overall employee benefits strategy. 

Fortunately, ALEs can reference and apply unique affordability safe harbors for each employee classification. In other words, an employer could use rate of pay safe harbor for all hourly employees while using W-2 safe harbor for salaried employees, or even use the Federal Poverty Line safe harbor for all employees to begin simplifying calculations, tracking, and reporting. Let’s explore each of the IRS-approved affordability safe harbors that are available to ALEs.

Different Affordability Safe Harbor Options

W-2 Safe Harbor – This is considered a viable option to determine affordability for salaried or full-time employees who are likely to work more than 30 hours a week consistently and predictably. W-2 safe harbor is determined based on all hours worked and wages paid to the employee (Box 1 W-2 earnings) and usually allows an employer to charge employees a higher monthly premium.

The downside of using a W-2 safe harbor to determine affordability is that if even one employee (due to life circumstances or workplace changes) goes on unexpected unpaid leave or works less hours than expected, the monthly premiums would later be considered unaffordable as the employee’s total annual pay decreases as a result of these unanticipated changes. Also, some employers mistakenly forget that W-2 safe harbor excludes any compensation deducted pre-tax, as well as 401(k) contributions, relying solely on Box 1 W-2 earnings.

Rate of Pay Safe Harbor – Using this safe harbor, health insurance coverage is considered affordable if an employee’s monthly contribution amount does not exceed 9.12% (in 2023) of a 130-hour period multiplied by the employee’s hourly rate of pay on the first day of the coverage period/plan year, or their lowest hourly rate during the calendar month. Rate of pay safe harbor can also be used for salaried employees. In this case, an employee’s contribution should not exceed 9.12% of their monthly salary based on the first day of the coverage period/plan year.

Rate of pay safe harbor is most commonly used to establish contribution rates for an entire employee base using the hourly rate of the lowest-paid hourly employee to determine rate. Of course, employers may choose to use a tiered system where employer contributions are higher for lower-paid employees and lower for higher-paid employees.

Federal Poverty Line Safe Harbor – The Federal Poverty Line safe harbor is the most direct method of determining affordability. Using the federal/annual poverty line for 2023 ($14,580), this figure is multiplied by the 2023 affordability percentage (9.12%), then divided by 12 for an employer to establish affordable monthly coverage. For 2023, the yearly amount is $1329.69, making the monthly premium goal $110.80. Premiums at this amount (or below) are considered affordable using the federal poverty line safe harbor.

Some employers prefer this safe harbor calculation method because an employee’s hourly rate, total yearly income, or hours worked have no bearing on the affordability calculation. It is a “universal” approach/calculation method that ensures compliance and prevents penalization due to unaffordability regardless of employee classification or unexpected variables in an employee’s compensation, hours, retirement contributions, or (un)paid time off. 1095-C reporting is also majorly simplified, facilitating a uniform approach to submissions. 

Of course, the one major downside of using the FPL safe harbor to determine affordability is that it is generally more expensive than the W-2 or rate of pay methods.

Applying Safe Harbors to Employee Categories & Reporting Accurately

Federal safe harbor types can be used to calculate affordability for different employee types/bases. This includes salaried versus hourly employees, which we’ve already explored. However, the IRS also permits categorical distinctions based on the following:

  • Employees who work in different jurisdictions or states
  • Employees with specific or specialized job responsibilities
  • Employees who are part of a union/collective bargaining agreement, and those who are not

In each case, any safe harbor choice based on employee category must apply to all employees uniformly within that category and can only be modified in future plan years.

Whether your organization uses one or multiple safe harbors to calculate affordability, your use of a safe harbor must be reported to the IRS on Form 1095-C, using the appropriate code for each safe harbor that has been used for calculations. Reporting is especially essential when an employee has declined coverage but reports that they were not offered affordable health coverage by their employer.

Payday Payroll's Approach to ACA Compliance 

Calculating ACA affordability with safe harbors can be a complicated process, particularly if you’re using multiple safe harbors across employee categories and adapting to ongoing changes within your workforce. Responsibly using safe harbors protects your organization from incurring penalties and fines for ACA noncompliance while strengthening company culture and employee satisfaction by providing fair and affordable benefits to your employees.

Payday’s benefits solutions can grant you peace of mind about safe harbor rules, ACA calculations, IRS reporting requirements, measurement periods, and shifting workforce concerns. We work with you to evaluate and refine your benefits strategy to support sustainable budgeting, employee well-being, and long-term legal compliance. Whether it’s tracking benefits eligibility; plan selections or terminations; income or tenure-based benefits; or local, state, and federal compliance, we help you manage all of these concerns from a single, easy-to-use digital platform that can be seamlessly integrated with your other HR processes.

Simplify Employee Benefits and Compliance with Payday 

Ready to guarantee your company's ACA compliance, secure financial stability, and return focus to your most pressing business tasks? Discover how Payday Payroll's ACA tracking and reporting services can simplify benefits and retirement planning. Get in touch with us today for a consultation.

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