The Rate of Pay Safe Harbor: 1 of 3 Affordability Safe Harbors

Fortunately, the IRS has made available three affordability safe harbors that employers can use to help prove ACA affordability.

Using the 3 safe harbor calculations we can answer how employers prove to the IRS that the healthcare plans they are offering to their workforce are affordable under the ACA. This week we will be talking about the first one: the Rate of Pay Safe Harbor.

So, how do employers prove to the IRS that the healthcare plans they are offering to their workforce are affordable under the ACA?

It’s an important question for Applicable Large Employers (ALEs) or employers with 50 or more full-time and full-time equivalent employees. That’s because providing affordability is a critical piece for complying with the ACA’s Employer Mandate and failing to do so could result in penalties.

With the final 2021 ACA reporting deadline approaching quickly, now is the time to ensure you’re correctly applying and documenting the safe harbors in your filings.

To begin, we answer the question, What is the Rate of Pay Safe Harbor?

The Rate of Pay Safe Harbor is a method for proving ACA affordability that is based on an employee’s hourly rate or monthly salary rate. Best practices suggest performing the safe harbor calculation for each full-time employee monthly.

To calculate ACA affordability for the 2022 tax year under the Rate of Pay Safe Harbor using hourly workers’ earnings, take the employee’s lowest hourly rate as of the first day of the coverage period and multiply it by 130, the minimum total of hours an employee must work on average to be ACA full-time.

Then, take that product and multiply it by the 2022 affordability threshold, 9.61%. This will identify the maximum monthly premium that the employee can pay to satisfy 2022 ACA affordability. 

Take, for example, $20/hr x 130 hours x 9.61% = maximum monthly premium of $249.86. 

For this particular situation, to claim the Rate of Pay Safe Harbor using hourly wages, the monthly contribution cannot exceed $249.86.

For a salaried employee, take the monthly salary as of the first date of the coverage period and multiply it by the appropriate affordability percentage for the year. 

Here’s an example: $2,000 monthly salary x 9.61% affordability threshold for 2022 = maximum monthly premium of $192.20 to claim the Rate of Pay Safe Harbor.