What is ACA Safe Harbor? (2024)

Types of Affordability Safe Harbor

Each safe harbor method has distinct advantages and disadvantages for different employers and employee types. Some prioritize simplicity and standardization, while others are more flexible and adaptable for irregular workforces.

Specific rules and regulations related to the ACA may change over time, so you should consult legal or regulatory experts before deciding which method to use.

W-2 Box 1 Wages Safe Harbor

Under this method, the monthly premium for self-only coverage must not exceed 9.02% of the employee's W-2 Box 1 wages, which is the employee's gross income minus pre-tax deductions. The coverage must be affordable for all the months the employee is eligible.

For example, an employee with a W-2 Box 1 wage of $80,000 would have to have a maximum monthly premium of $601.33 or less for their employer’s plan to be labeled as affordable.

Advantages: Because coverage must be considered affordable throughout the year, the W-2 Box 1 Wage Safe Harbor is a good option for employers with mostly salaried, full-time employees who work steady hours.

Disadvantages: This method can become complicated to administer if an employee goes out on unpaid leave or works erratic hours that make the employee’s W-2 pay less than expected.

Federal Poverty Line (FPL) Safe Harbor

This method uses the FPL as its baseline, which is adjusted annually based on the cost of living. To qualify, the monthly premium for self-only coverage must not exceed 9.02% of the FPL for the employee's household size.

The poverty level guidelines are not available until the end of January or later, therefore IRS guidance allows employers to use the poverty guidelines in effect within six months before the first day of the employer’s plan year. In other words, an employer with a plan year starting January 1, 2025, may use the 2024 federal poverty guideline amount to determine their 2025 FPL safe harbor's monthly threshold amount.

For 2024, the FPL for a one-person household is $15,060, which means for a 2025 plan to be called affordable the maximum monthly premium for self-only coverage can’t exceed $113.20.

Advantages: The FPL Safe Harbor is the simplest of the three methods, as it isn’t affected by the employee’s hourly rate, number of hours worked, or total annual income. In other words, the calculation is more standardized for all workers.

Disadvantages: It’s likely the least affordable for most employers because it doesn't allow them to charge higher premiums to high-income employees. For most employees, the FPL Safe Harbor method will result in the lowest maximum affordable premium.

Rate of Pay Safe Harbor

This method uses an employee’s regular rate of pay to gauge affordability. To qualify, the monthly premium for self-only coverage must not exceed 9.02% of either:

• The employee's lowest hourly rate of pay multiplied by 130 hours, or
• The employee's monthly salary (provided it wasn't reduced during the year)
  

Advantages: Rate of Pay Safe Harbor is a fairly predictable method. Regardless of the numbers of hours worked by the individual employee, the affordability calculation is always based on the hourly pay rate multiplied by 130 hours. Simply put, an employer can perform the calculation for their lowest-paid employee and if the premium is affordable for that employee, it'll be affordable for everyone.

Disadvantages: Because of the 130-hour standard, Rate of Pay Safe Harbor may not allow for the highest employee premium contributions. A company can't take advantage of accumulated employee income when they regularly work more than 30 hours per week.

ACA Safe Harbor Codes

The IRS requires all ALEs to report employee health coverage on Form 1095-C. Use the following codes on Line 16 to indicate which safe harbor method was used.

ACA Non-Compliance Penalties

Employers who fail to demonstrate affordability under the ACA may be subject to two types of penalties called “employer shared-responsibility payments.” This failure is most easily confirmed when a full time employee is eligible for and/or receives a premium tax credit for a healthcare marketplace despite being enrolled in the employer's plan. Effective December 31, 2023, these penalties include the following amounts:

• 4980H(a) Penalty -If the employer fails to offer coverage or offers it to less than 95% of its full-time employees and their dependents, they're fined $2,970 per full-time employee (minus the first 30 employees).
• 4980H(b) Penalty - If the employer offers coverage that isn't "affordable" or doesn't have "a minimum value", they're fined each month there's a violation and must pay the lesser of the following amounts:
  • $2,970 per full-time employee (minus the first 30 employees)
  • 1/12 of $4,460 per employee who received a tax credit that month
    

Employers should review IRS safe harbor guidance and speak to a trusted legal advisor for additional guidance. Previous penalty amounts are provided on the IRS website.

Read More

• ACA Compliance Guide for Employers
• IRS Rule (PDF): Shared Responsibility for Employers Regarding Health Coverage
• IRS Website: Employer Shared Responsibility Provisions

Related Glossary Terms

• Affordable Coverage
• Applicable Large Employer (ALE)