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Affordability Safe Harbors for ALEs

Friday, August 20, 2021


Under the Affordable Care Act (ACA), Applicable Large Employers (ALEs) are vulnerable to one of two potential employer shared responsibility penalty assessments. The “Subsection (a) Penalty” applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees (and their dependents) and at least one full-time employee qualifies for a premium subsidy.


Alternatively, the “Subsection (b) Penalty” applies where the employer meets the 95% offer threshold but fails to offer minimum value, affordable coverage to a full-time employee and that employee then qualifies for a premium subsidy. Ensuring an offer of coverage is affordable, then, is critical to avoiding the Subsection (b) Penalty.


Using a Safe Harbor

Coverage is deemed affordable for an employee so long as the employee’s required contribution for self-only coverage does not exceed a specified percentage of the employee’s household income (for 2021, this percentage is 9.83%). Because an employer has no way of knowing an employee’s household income for purposes of calculating the affordability of coverage, the IRS provides three safe harbors that ALE can use.


If an ALE uses any one of the safe harbors, its offer of coverage will be considered affordable. This is true even if the cost of coverage actually exceeds the specified percentage of the employee’s household income. Use of a safe harbor for determining the affordability of minimum value coverage will protect an ALE against the Subsection (b) Penalty.


Three Affordability Safe Harbors

Each of the three safe harbors requires the employer to follow a specified calculation in determining affordability. There are nuances to all three; the following is only a summary explanation.


Federal Poverty Line

The Fedal Poverty Line (FPL) safe harbor requires that the employee’s monthly cost for self-only coverage not exceed a specified percentage (9.83% in 2021) of the FPL for a single individual divided by 12.


Rate of Pay

The rate of pay safe harbor utilizes an employee’s hourly or monthly rate of pay in determining affordability. For hourly employees, this method requires the employer to take the employee’s hourly rate of pay as of the first day of the plan year and multiply it by 130 hours. For salaried employees, the employer simply uses the employee’s monthly salary as of the first day of the plan year.



The W-2 safe harbor calculates affordability at the end of the year and on an employee-by-employee basis by using the employee’s W-2 wages (reported in Box Under this method, an employee’s contribution cannot exceed a specified percentage of their W-2 wages. And importantly, the employee contribution must remain a consistent amount or a consistent percentage of the year’s W-2 wages, precluding monthly variations and discretionary adjustments by the employer.


Next Steps

Content ALEs should select one of the three safe harbors to use in determining the affordability of coverage offered to full-time employees (note: an employer may choose to apply a different safe harbor to reasonable categories of employees on a consistent basis). A safe harbor should be used prior to plan renewal each year to set an appropriate – and affordable – premium contribution strategy, and employers should ensure that the chosen method is applied accurately; deviations from any of the methods will render the ALE unable to claim the safe harbor. And finally, when completing the required ACA reporting under Internal Revenue Code Sec. 6056, ALEs should use a Line 16 safe harbor code that corresponds with their chosen method.


Additional Resources



This Benefits Brief is not intended to be exhaustive, it is for informational purposes only and should not be considered legal or tax advice. A qualified attorney or other appropriate professional should be consulted on all legal compliance matters.


Posted by in Blog, Health & Benefits, Human Resources

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