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Calculating ACA Affordability under the Employer Mandate

Posted on November 7th, 2017

The original version of this article was published on January 15, 2016. It has been updated annualy to account for inflationary changes. 

 
The Employer Mandate guidelines state that coverage is affordable when an employee has to pay no more than 9.5% of their household income (inflation-adjusted to 9.78% for the 2020 plan year) for self-only coverage which is offered, but which employers know the household income of an employee? As a result, there are three alternative methods that an employer can rely upon when determining if the coverage they offer is affordable. These methods are explained below and some general examples of how to apply each method have also been provided. Assume in each example that the employer has a calendar plan year for 2020.
 

W-2 Safe Harbor Method

Coverage is deemed affordable if the employee is charged no more than 9.78% of current year wages according to Box 1 of their W-2. Please note that this method is relatively simple to apply, but it uses current year wages which won’t be known until the year is over. That means an employer may not know if coverage is affordable until the year is over.

Example 1. Joe is employed at XYZ Inc. for the entire year and is offered coverage for all 12 months. His wages according to Box 1 of his W-2 are $28,000. XYZ Inc. will be considered to offer affordable coverage provided Joe is not charged more than $228.20 per month for coverage. The formula is ($28,000 x .0978)/12 = $228.20.

Example 2. Joe is hired by XYZ Inc. on May 15, 2020, and is offered coverage after his waiting period on August 1, 2020. His W-2 wages according to Box 1 of his W-2 are $20,000. In this scenario, an adjustment can be made to the W-2 wages used in the affordability calculation since Joe was not employed for the entire year and he was subject to a waiting period before coverage was offered.

Formula = W-2 wages * (calendar months offered coverage / months of employment) = $20,000 * (5/8) = $12,500
 
The W-2 wages used in the affordability calculation are adjusted to $12,500 for the 5 months Joe is offered coverage. XYZ Inc. will be considered to offer affordable coverage provided Joe is not charged more than $244.50 per month for coverage. The formula is ($12,500 x .0978)/5 = $244.50.
 

Rate of Pay Safe Harbor Method 

Coverage is deemed affordable if the employee is charged no more than 9.78% of their monthly rate of pay at the start of the coverage period. Always use 130 hours when determining the monthly rate of pay for hourly employees regardless of actual hours worked. For non-hourly employees, affordability is tied to the monthly salary at the start of the coverage period. The rate of pay method should not be used for employees who receive wages by virtue of tips or employees who are paid solely by commissions. 

Example 1. Kathy works for XYZ Inc. and makes $15 per hour as of the start of the plan year.  XYZ Inc. will be considered to offer affordable coverage provided Kathy is not charged more than $190.71 per month for coverage. The formula is ($15 x 130) x .0978 = $190.71.  

Federal Poverty Level (FPL) Safe Harbor Method

Coverage is deemed affordable if the employee is charged no more than 9.78% of the most recently published mainland FPL for a household of one. 

Example 1. The most recently published mainland FPL for a household of one is $12,490. XYZ Inc. will be considered to offer affordable coverage to employees who are not charged more than $101.79 per month for coverage. The formula is ($12,490 x .0978)/12 = $101.79.

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The materials contained within this communication are provided for informational purposes only and do not constitute legal or tax advice. 
 

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