What is ‘Affordable’ Coverage under ACA?

Basically, if an employee’s share of the premium does not cost the employee more than 9.5 percent of that employee’s annual household income, the coverage is “affordable.” If an employer offers multiple healthcare coverage options, the affordability test applies to the lowest-cost, self-only option available to the employee. (Note that the coverage must also meet the minimum value requirement). The percentage under the “household income” test is annually indexed and has increased to 9.66 percent. However, most employers are using the W-2 safe harbor, described below.

There are three (3) affordability safe harbors:

  • W-2 wages safe harbor – This is the safe harbor that most employers are using rather than the “household income” method, as it is difficult to know what an employee’s total household income is. This safe harbor is met if the employee’s portion of self-only coverage does not exceed 9.5 percent of their Form w-2 wages, as reported in Box 1.
  • The rate of pay safe harbor – generally is based on the employee’s rate of pay at the beginning of the coverage period, with adjustments permitted, for an hourly employee, if the rate of pay is decreased (but not if the rate of pay is increased).
  • The federal poverty line safe harbor – generally treats coverage as affordable if the employee contribution for the year does not exceed 9.5 percent of the federal poverty line for a single individual for the applicable calendar year.

Prepared by Jamie M. Brabston, senior counsel with Lehr Middlebrooks Vreeland & Thompson, P.C.

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