The Affordable Care Act (ACA) mandates that applicable large employers (ALEs) offer affordable health coverage to their full-time employees. But what exactly defines “affordable” coverage, especially when considering part-time employees? While the ACA doesn’t differentiate the affordability definition specifically for part-time versus full-time employees who are considered full-time equivalents, understanding how affordability is determined is crucial for both employers and employees.
Under the ACA, employer-provided coverage is deemed affordable if the employee’s required contribution for the least expensive, minimum-value coverage is no more than 9.5 percent (adjusted annually) of that employee’s household income. This percentage is a critical threshold in determining affordability. The “employee required contribution” includes any payments made by the employee, including through salary reductions, and takes into account factors like health reimbursement arrangements (HRAs), wellness incentives, and opt-out payments that might reduce the employee’s out-of-pocket expenses.
However, employers generally lack access to information about their employees’ household incomes. To address this practical challenge, the IRS provides three affordability safe harbors that employers can utilize. These safe harbors are based on data that employers do have readily available, such as wage information and pay rates. If an employer’s coverage offer meets the affordability standard under any of these safe harbors, it is considered affordable under the employer shared responsibility provisions of the ACA, regardless of whether it would be considered affordable based on an employee’s actual household income. This is significant because the household income test is primarily used to determine an employee’s eligibility for premium tax credits when purchasing coverage through the Health Insurance Marketplace.
Here are the three key affordability safe harbors employers can use:
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Form W-2 Wages Safe Harbor: This safe harbor generally relies on the amount of wages reported to the employee in Box 1 of their Form W-2. If the employee’s premium contribution for the year is 9.5% or less of their Form W-2 wages, the coverage is considered affordable.
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Rate of Pay Safe Harbor: This safe harbor is based on an employee’s hourly rate of pay at the start of the coverage period. For hourly employees, this calculation can be adjusted if their pay rate decreases, but not if it increases. Using the rate of pay provides a predictable and easily accessible metric for employers to assess affordability.
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Federal Poverty Line Safe Harbor: This safe harbor deems coverage affordable if the employee’s monthly contribution does not exceed 9.5 percent of the federal poverty line for a single individual, divided by 12. This safe harbor offers a simplified approach using a nationally recognized benchmark for poverty.
Employers have the flexibility to choose which safe harbor to use. They can even use different safe harbors for different categories of employees, as long as the categories are reasonable and the chosen safe harbor is applied consistently within each category. It’s also important to note that if an employer offers multiple health coverage options, the affordability test is always applied to the lowest-cost self-only coverage option that provides minimum value and is available to the employee.
While the ACA’s employer mandate primarily focuses on “full-time employees” (defined as working 30 or more hours per week on average), the concept of affordability is equally relevant when considering employees who might be classified as part-time by their employer but are still considered full-time employees under the ACA’s definitions due to hours worked or full-time equivalent calculations. For these employees, the same affordability rules and safe harbors apply.
For more in-depth information on affordability, including how HRAs, wellness incentives, flex credits, and opt-out payments impact affordability calculations, you can refer to Notice 2015-87 PDF (questions 7-12) and the proposed regulation PDF on the premium tax credit. These resources offer further clarification and guidance on navigating the complexities of ACA affordability for employers and ensuring employees have access to affordable health coverage.
