ACA Safe Harbors – Who Needs Them and How Do They Work?
With seven reporting years behind us, we may be thinking that we’ve got this ACA thing down and there is nothing more to learn (or maybe we just don’t want to!). Yet, making sure that your company is using safe harbors efficiently could lead to improved methods of determining affordability and make 2022 and beyond run even smoother.
By now we have all seen the words “Safe Harbor” and we might even think we know all there is to know about them – but let’s re-evaluate what these important tools are and how they benefit us. Here’s a brief rundown of each safe harbor and what they mean.
W-2 Safe Harbor: Generally considered the more difficult to determine safe harbor, affordability is determined solely on the wages paid to the employee (and any other member of the same Applicable Large Employer (ALE) that pays wages to that employee) as reported in Box 1 of the employee’s Form(s) W-2.
Rate of Pay Safe Harbor: Coverage is determined as affordable for a calendar month if the employee’s responsibility does not exceed 9.61% (for 2022) of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay as of the first day of the calendar month. For non-hourly employees, the employee’s responsibility cannot exceed 9.61% of the employee’s monthly salary, as of the first day of the coverage period. This safe harbor may be applied to hourly as well as salaried employees. Rate of pay may get relatively complicated.
Federal Poverty Line Safe Harbor: Generally considered the simplest measure of affordability, this safe harbor bases affordability off of the federal poverty line. For 2022, the employee’s monthly required contribution is based off of 9.61% of the federally mandated $12,8800 (for 2022 plan year) annual poverty line divided by 12 months. The purpose of this safe harbor is to provide employers a predetermined maximum amount that will always result in the coverage being deemed affordable. To calculate affordability for 2022 filing year, 9.61% x $12,880 = $1237.77. Divide $1,237.77 by 12 (months) to get $103.15 as the monthly premium goal.
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Okay, okay – so we know what defines the safe harbors, but which one is best for your company?
Remember that these safe harbors are only meant as a test for affordability based on only the income information readily available to the employer. In most cases this means that affordability can be based on only the employee’s income – not their total household income. Safe harbors can be exchanged in and out to best suit a company’s current plans each year. According to the IRS, a company can use one or more safe harbors for all of its employees or for any “reasonable category of employees.” What is a category, you may ask? Examples of categories may include a specific job, category of compensation (hourly or salary), or geographic location. Separate safe harbors may be used for each category, making sure that you are measuring affordability based on the most relevant information.
Knowing which safe harbors are most beneficial to your company can help a lot when it comes to determining affordability. Integrity Data’s website provides many knowledge base (KB) articles and blogs to help you along in your 2022 and beyond filings.