Applicable Large Employers (ALEs) are generally employers that average at least 50 full-time and full-time equivalent employees. Under the Affordable Care Act, ALEs can either provide health insurance coverage to employees or pay a penalty. To avoid a penalty, ALEs must offer health coverage to at least 95% (70% in 2015) of its full-time employees and their dependents. But, not any old group health insurance coverage will do.
Coverage that is offered must provide minimum value and must be affordable. The minimum value requirement is generally met if the plan covers at least 60% of the costs of benefits. To be affordable, the employee’s share of the premium cannot be more than 9.5% of that employee’s annual household income.
Since employers generally will not know each full-time employee’s household income, employers may use one or more of the ACA’s three affordability safe harbors. If an employer satisfies one or more of these safe harbors, coverage will be considered affordable even if it costs more than 9.5% of a particular employee’s annual household income.
Form W-2. Coverage will generally be considered affordable if the employee’s required calendar year contribution for the employer’s lowest cost self-only coverage does not exceed 9.5 percent of that employee’s Form W-2 wages.
- Calculated on an employee-by-employee basis at the end of the calendar year.
- Employee’s required contribution amount or percentage must be consistent throughout the calendar year, so discretionary adjustments to employee contribution requirements for a pay period are not allowed.
- Wages are adjusted if coverage is not offered for an entire calendar year.
- Generally produces the highest ‘affordable’ monthly contribution because the calculation is based on wages for all hours worked and paid time off wages (sick, vacation, etc.).
- Optimal for employers with a relatively stable workforce that are unlikely to reduce compensation levels during the year.
Rate of Pay. Coverage will generally be considered affordable if the employee’s required monthly contribution for the lowest cost self-only coverage does not exceed 9.5% of an amount equal to 130 multiplied by the employee’s lowest hourly rate of pay during the calendar month or the hourly rate on the first day of the coverage period (generally the first day of the plan year), whichever is lower. Monthly salaries are used for non-hourly employees.
- Calculated monthly on an employee-by-employee basis.
- Employees credited with 130 hours of work per month, regardless of hours actually worked.
- Generally produces a lower ‘affordable’ monthly contribution than the Form W-2 safe harbor because the calculation is based on wages for 130 hours of work per month (30 hours per week).
- The maximum monthly ‘affordable’ contribution for an employee making the federal minimum wage of $7.25 per hour is $89.54 ($7.25 x 130 = $942.50 x .095 = $89.54). The monthly maximum would be $123.50 for an employee making $10 per hour and $148.20 for an employee making $12 per hour.
Federal Poverty Line. Coverage will generally be considered affordable if the employee’s required monthly contribution for the lowest cost self-only coverage does not exceed 9.5% of the applicable calendar year’s federal poverty line (FPL) for a single individual, divided by 12.
- The 48 contiguous states are given a single FPL; Alaska and Hawaii each have their own FPL.
- The 2015 FPL for the 48 contiguous states is $11,770, so the maximum monthly ‘affordable’ contribution would be $93.18.
- Generally produces the lowest ‘affordable’ monthly contribution of all the safe harbors.
These safe harbors are optional. ALEs may use one or more of these safe harbors and can apply them to any reasonable category of employees, but they must be applied uniformly and consistently to all employees in a category. Reasonable categories can be based on specified job categories, compensation type (hourly or salary), geographic location or other similar bona fide business criteria.
At Setnor Byer Insurance & Risk, we are committed to guiding you through the constantly changing health care landscape. In addition to our other valuable risk management solutions, Setnor Byer Insurance & Risk has an online tool to help clients complete their ACA information reports.
Please contact us if you have any questions or would like to discuss how we can help you comply with health care reform.