Affordability Safe Harbors: Rate of Pay (1 of 3)

Recently the IRS updated the affordability percentage to 9.78% for plan years that start on or after Jan 1, 2020.  This percentage is used by applicable large employers to determine whether or not the employer’s coverage is considered affordable for that employee. There are 3 affordability safe harbors an employer can use to determine whether or not coverage is “affordable” for a certain employee. The 3 safe harbor methods include:

1. Rate of Pay

2. W-2

3. Federal Poverty Level

Let's look closer at the Rate of Pay method: This safe harbor may be most useful where the employer has a large number of hourly employees, as it uses a flat rate of 130 hours per month in the affordability calculation, regardless of the number of hours the employee actually works. Also, it uses the employee’s hourly pay rate (as long as the pay rate doesn’t decrease during the year), which is predictable and easy to determine on a prospective basis. For example, an employee is offered employer-sponsored coverage that meets minimum value. For the 2020 calendar year, his employer is using the rate of pay safe harbor to set premium amounts for full-time employees who make $7.25 per hour (minimum wage in the employer's area). The employer would use 130 hours per month times $7.25 per hour (which is $942.50 per month). In order to meet the safe harbor, the employer would set the employee’s monthly premium cost that doesn’t exceed 9.78% of $942.50 (which is $92.18 per month). Thus, the employer sets the employee contribution for self-only coverage for the lowest-cost plan at $90 per month for 2020, which is less than the threshold and is therefore affordable for this employee. If an employee is paid salary instead of hourly, coverage is considered affordable if the employee’s cost does not exceed 9.78% of the employee’s monthly salary as of the 1st day of the coverage period. If coverage is offered during at least one day during the month, the entire month is counted for purposes of determining the employee’s income and for determining the employee's portion of the premium for the month. Note, plans that renew 11/1/19 or 12/1/19 would need to use the 2019 affordability percentage, which is 9.86%, for the entire plan year. Therefore, an applicable large employer needs to decide which affordability safe harbor they will use and ensure premium contributions are designed properly before the plan’s start date, and NOT wait to figure it out during ACA reporting.