Is your health care plan affordable under the ACA? 3 ways to find out.

Under the Affordable Care Act, health care is supposed to be … well, affordable. The language sounds simple, but like most aspects of the ACA, there’s more to it beneath the surface.

When looking at the health care coverage that applicable large employers must offer their full-time workers, “affordable” means the lowest-cost self-only coverage health care plan does not exceed 9.66 percent (adjusted annually) of an employee’s income.

How do you figure out that definition of affordable? There are three ways: using the W-2 safe harbor, the rate of pay safe harbor, or the federal poverty level safe harbor. Each of these safe harbors has benefits and challenges, but a plan only needs to match the requirements using one to prove affordability and compliance in the case of an audit. Therefore, even if a plan is less than 9.66 percent of an employee’s income based on their hourly wage, but higher than 9.66 percent of the federal poverty rate (as it will be in most cases), it is still considered “affordable.”

You don’t have to use a safe harbor to prove affordability if you don’t want to, but without proof from one of the following methods to back up your case, you could be faced with penalties for offering an unaffordable plan.

The W-2 safe harbor

Using an employee’s wages from this year’s W-2 is often the most reliable way to figure out affordability. Because it takes into account all the income employees received from the company for the year, not just a monthly estimate, it can help accurately answer what 9.66 percent of the employee’s income is. It also enables coverage to be priced based on the level of each employee, rather than using a blanket price.

If the employee was covered and employed for the entirety of the year, simply multiply their Box 1 W-2 wages by 9.66 percent. If they were employed for fewer than 12 months, or insured for fewer than 12 months, divide their total wages by the total number of months employed, and then multiply it by the number of months they were offered coverage. After that, multiply it by 9.66 percent to get the “affordable” cost of a plan for the entirety of that year.

W-2 wages should be calculated on an employee-to-employee and month-to-month basis (if wages vary throughout the year), so it’s a more time-consuming option. If your staff consists mostly of stably paid and employed workers, calculating from the W-2 can give you the closest estimate to the most a plan can cost while still being affordable. But, if there is a lot of turnover and variation in your staff, such as in the hospitality or food industries, another option might be simpler.

The monthly rate of pay safe harbor

This safe harbor uses the hourly rate of pay for ACA full-time employees in order to figure out affordability. In order to do this, employers should identify the hourly rate being paid on the first day of the plan year (or the lowest monthly rate for the year) for each individual employee and  multiply it by 130 (the number of monthly hours that qualifies a worker as ACA full-time) to determine what is considered a monthly payment. This amount is then multiplied by 9.66 percent to calculate affordability.

This can be done on a month-by-month basis or a yearly basis, so long as the lowest wage is used for the whole year—and it will continue to be counted as affordable even if an employee has reduced hours in a month, or goes on unpaid leave. On the flip side, however, if an employee works more than 130 hours, the extra hours don’t get counted toward the total, and the “affordable” price tag cannot be raised.

If an employer chooses to do so, the lowest paid employee can act as an example for the entire pool of employees. Whatever is considered affordable to the lowest-paid worker will also be affordable to anyone else in the company; however, this means that plans will probably cost less for some than they could, meaning more company money could be spent making up the difference.

The federal poverty rate safe harbor

The last way to calculate affordability is to use the annual federal poverty rate. It’s a simple calculation (multiplying the flat rate by 9.66 percent and dividing it by 12 to determine affordability for each month) that acts as a fail-safe, and can be applied to the whole company without worrying about whether or not it meets affordability. Unfortunately, this means that the simplest plan is also the absolute lowest amount an employee can pay, putting more burden on the employer to cover the cost of insurance.

If your employees have largely variable hours and are low earners, this is an easy way to ensure compliance. In other cases, it may be wiser to use either the W-2 or monthly rate of pay to calculate affordability in order to save on employer cost.

Find which one works for you

No matter which you choose, you should use one of these safe harbor calculation methods to ensure your compliance. Mistakes and oversights are the worst reasons to accrue penalties, and without one of these safe harbors in place, your chances of one or the other go up. Pick a safe harbor, document it on line 16 of Form 1095-C, and ensure you’re covered in the case of an audit. Compliance can be confusing, but doubling down on your affordability calculations can save some hassle.