Content updated on February 11, 2020

affordability safe harbor guidance for Line 16 of 1095-C form_Integrity Data

To sharpen the rendering of this image, please click to enlarge – particularly to see the footnote of the change in IRS guidance for Code 1A, which was announced January 25, 2016.

Since employers don’t know their employees’ household incomes, how do they document what’s “affordable” on their 1095-C returns to the IRS?

The IRS gives employers three ways to declare on their Affordable Care Act returns – specifically, Line 16 of Form 1095-C – just how affordable their employees’ contributions to coverage were.

If you employ lower-wage workers, you especially have to pay attention to the affordability safe harbors. Fines for offering non-compliant coverage – aka the ACA tack hammer penalty, covered in this article – will be assessed monthly. Calculations for these three tests are called the affordability safe harbors. You may also hear them mentioned in reference to Section 4980H, which is the ACA section of the Internal Revenue Code with the Employer Shared Responsibility Provisions.

  • The penalty-assessment period began January 1, 2015 for employers with 100 or more full-time employees, including full-time equivalents.
  • If you have 50 of more full-time employees, including full-time equivalents, your penalty-assessment period under Section 4980H began January 1, 2016.

Here we explain the safe harbor rules, so you can decide how these options can best serve your company.

The 3 affordability safe harbors

If an employer is offering full-time employees and their dependents health insurance that meets the ACA standard of minimum essential coverage, and offers minimum value (what’s needed for a taxpayer to comply with the ACA individual mandate), the IRS allows the employer to use one or all three of these tests for affordability:

  • W-2 Wages safe harbor
  • Rate-of-Pay safe harbor
  • Federal Poverty Line (FPL) safe harbor

Just one safe harbor per plan. Employers with multiple plans can apply different safe harbors to different plans – they do not need to be identical.