By Martin Simon
If an employer covered by the Affordable Care Act play-or-pay requirements decides to play by providing health insurance coverage, it could still be hit with penalties if the coverage is “unaffordable.” Coverage is unaffordable if one or more of the employer’s full-time employees receives a premium tax credit because he or she has to pay more than 9.5 percent of his or her household income for the employer provided coverage. 
Because employers have no way of knowing their employees’ household income, the IRS has created safe harbors for avoiding the possibility of penalties for providing unaffordable coverage. The affordability safe harbors apply only for purposes of determining whether an employer is subject to penalties. The safe harbors do not affect an employee’s eligibility for a premium tax credit, which will continue to be based on the cost of employer-sponsored coverage relative to an employee’s household income.
The safe harbors are all optional. An employer may choose to use one or more of these safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.
W-2 safe harbor
Under the W-2 safe harbor, an employer could determine affordability by reference to an employee’s wages from that employer. Wages for this purpose would be the amount reported in Box 1 of Form W-2, Wage and Tax Statement (referred to as Form W-2 wages). For the Form W-2 safe harbor to apply, the required employee contribution toward the self-only premium for the employer’s lowest cost coverage that provides minimum value (the employee contribution) may not exceed 9.5 percent of the employee’s Form W-2 wages for that calendar year.
Application of the W-2 safe harbor is determined after the end of the calendar year and on an employee-by-employee basis, taking into account the employee’s Form W-2 wages from the employer and the employee contribution. Although the determination of whether an employer actually satisfied the safe harbor is made after the end of the calendar year, an employer could also use the safe harbor prospectively, at the beginning of the year, to set the employee contribution at a level so that the employee contribution for each employee would not exceed 9.5 percent of that employee’s Form W-2 wages for that year (for example, by automatically deducting 9.5 percent, or a lower percentage, from an employee’s Form W-2 wages for each pay period).
For an employee who was not a full-time employee for the entire calendar year, the Form W-2 safe harbor is applied by adjusting the employee’s Form W-2 wages to reflect the period when the employee was offered coverage, and then comparing those adjusted wages to the employee’s share of the premium during that period.
Rate of pay safe harbor
Under the rate of pay safe harbor an employer would (1) take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan as of the beginning of the plan year, (2) multiply that rate by 130 hours per month (the benchmark for full-time status for a month), and (3) determine affordability based on the resulting monthly wage amount.
Specifically, the employee’s monthly contribution amount (for the self-only premium of the employer’s lowest cost coverage that provides minimum value) is affordable if it is equal to or less than 9.5 percent of the computed monthly wages. For testing salaried employees, monthly salary would be used instead of hourly salary multiplied by 130.
An employer may use this safe harbor only if the wages or salaries of the employees for whom the employer applies the safe harbor are not reduced during the year. The rate of pay safe harbor is a design-based safe harbor that should be easy for employers to apply and allows them to prospectively satisfy affordability without the need to analyze every employee’s wages and hours.
Federal poverty line safe harbor
An employer may also rely on a design-based safe harbor using the federal poverty line (FPL) for a single individual. Employer-provided coverage offered to an employee is affordable if the employee’s cost for self-only coverage under the plan does not exceed 9.5 percent of the FPL for a single individual. Employers are permitted to use the most recently published poverty guidelines as of the first day of the plan year of the employer’s health plan.
Martin Simon, J.D., is a Senior Legal Editor for BLR’s human resources and employment law publications. Mr. Simon has worked in legal publishing for over 20 years. He worked for 7 years as a legal editor for Prentice Hall, where he wrote and edited for the Pension and Profit Sharing and Plan Administrator’s Compliance Manual looseleaf services. He has been a legal editor for BLR for more than 17 years. Mr. Simon has been on the Board of the Hartford Chapter of Working in Employee Benefits for 4 years. Mr. Simon has a B.A. degree with Honors from the University of Connecticut, where he was a member of the Honors Program and Phi Beta Kappa. He received his law degree from the University of Connecticut and is a member of the Connecticut Bar.