Putting the “Affordable” in the “Affordable Care Act”

This guest blog is brought to you by tax and employment attorney Murphy Fletcher. Murphy and I work together on employment related questions, particularly where employment law and tax law merge. She loves to tackle a complicated IRS regulation and does so for you in this installment of our continuing ACA series, addressing the question of affordability. I hope you enjoy! Sabrina

When I was a kid, my mother and grandmother adopted the tradition common in many families – waking up at 6:00 A.M. on the Friday after Thanksgiving for the infamous Black Friday sales. Black Friday has become a month long event – with television and the internet consumed with advertisements for Black Friday sales at all of the big retailers that begin way before Thanksgiving and are still going even though we are into December. As an adult, I haven’t participated in Black Friday; to be honest, I would just rather sleep late and enjoy leftovers. But, despite my unwillingness to give up sleep and good food, Black Friday is incredibly popular because it makes many items (especially electronics, in my experience) more affordable.

Considering the title of this post, I imagine most of you see where I’m going. But in case you don’t: the goal of the Affordable Care Act, like Black Friday, is to make health insurance more affordable so that as many people as possible can obtain quality healthcare. To avoid the penalties imposed by the ACA, an employer must offer health insurance coverage that (1) provides “minimum value” (an issue not addressed in this post), and (2) is “affordable.” If an employee elects to enroll in health insurance under the federal or state exchange and receives a tax credit or cost-sharing reduction, the employer’s coverage fails to meet either the “minimum value” requirement or the “affordable” requirement.

So, the question becomes: what is “affordable” coverage under the ACA? According to IRS regulations, coverage is “affordable” if the cost to the employee is no more than 9.5% of the employee’s annual household income. This is all well and good, except for one issue: how will an employer know what that employee’s annual household income actually is?

Fortunately, the IRS predicted this very problem and created three “safe harbors” that an employer may rely on in determining if their health coverage is “affordable.” If the employer meets one of the safe harbors, the coverage provided will be considered “affordable” even if the employee receives a tax credit. The three safe harbors are:

W-2 Safe Harbor. If the employee’s required premium contribution for the calendar year for the lowest cost, self-only (excluding spouses and dependents) coverage does not exceed 9.5% of the employee’s Form W-2 wages paid by the employer for the same calendar year, then the coverage is “affordable.” However, to use this safe harbor, the employee’s contribution must be consistent in amount or percentage of the Form W-2 wages during the calendar year.

Example: Employee A is employed by Employer Z from January 1, 2015 through December 31, 2015. Employer Z offers Employee A and his dependents coverage during that period. The employee’s premium contribution for self-only coverage is $100 per month, of $1,200 for the year. Employee A’s W-2 wages from Employer Z are $24,000. The coverage is affordable, because $1,200 (what Employee A is required to contribute) is less than 9.5% of his W-2 wages ($1,200 is 5% of $24,000).


Rate of Pay Safe Harbor for Hourly Employees. If the employee is paid on an hourly basis, the coverage is “affordable” if the employee’s premium contribution for the calendar month for lowest cost, self-only coverage does not exceed 9.5% of 130 hours multiplied by the lower of: (1) the employee’s hourly rate on the first day of the coverage period, or (2) the employee’s lowest hourly rate during the calendar month.

Example: Employer W offers its full-time employees and their dependents coverage. Employer W pays these full-time employees $7.25 per hour (the minimum wage in Employer W’s jurisdiction) for each calendar month of all of 2016. Employer W applies the rate of pay safe harbor by using an assumed monthly income amount that is based on 130 hours of service multiplied by $7.25 per hour, or $942.50 per month. To satisfy the safe harbor, the employee premium contribution for self-coverage only cannot exceed 9.5% of $942.50, or $89.53.

For a salaried employee, coverage will be considered “affordable” under the rate of pay safe harbor if the employee’s premium contribution for lowest-cost, self-only coverage does not exceed 9.5% of the employee’s monthly salary as of the first day of the coverage period. If the monthly salary is reduced, including due to a reduction in work hours, the safe harbor is not available.


Federal Poverty Line Safe Harbor. Under this safe harbor, coverage will be considered “affordable” if the employee’s premium contribution for lowest-cost, self-only coverage does not exceed 9.5% of the federal poverty line for a single individual for the applicable calendar year, divided by 12. The federal poverty line used is the one for the state where the employee is employed.

Example: Employee F is employed by Employer T from January 1, 2015 until December 31, 2015. Employer T offers Employee F and his dependents coverage during that period. The federal poverty line is $11,670 for the year. To satisfy the safe harbor, Employee F’s monthly premium contribution cannot exceed $92.39 (9.5% of $11,670, divided by 12).

So there you have it: we’ve put the “affordable” in Affordable Care Act. However, as I’ve said previously, this is just one of the many factors that an employer must be mindful of in complying with the ACA. It is best for employers to remain in close contact with their legal counsel to ensure they are prepared to comply with the ACA.

Happy Holidays, and if you shopped on Black Friday or if you are still shopping the Black Friday sales, I hope you find some extra “affordable” deals!

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