The IRS just released a new percentage to calculate whether an employer-sponsored health plan is affordable for individuals who purchase coverage from an Exchange. But employers will need to rely on the old number to avoid penalties.

Large Employers Must Offer Affordable Coverage

One of the most commonly known requirements of the Affordable Care Act (the “ACA”) is that large employers must offer health insurance coverage to their employees, or potentially face thousands of dollars in penalties. But it’s not enough that the employer offer coverage—the coverage must also be “affordable” and must meet certain minimum value standards.

For employees, the requirement to be covered by a health plan became effective January 1, 2014. Employees and their family members, who purchase coverage from an Exchange, are eligible for premium tax credits and cost-sharing subsidies only if the coverage offered by their employer is not considered affordable. In general, for employer-sponsored coverage to be “affordable” in 2014, the employee’s share of the premium (based on the least expensive employee only premium) could not be more than 9.5% of the employee’s household income.

Update to Affordability for 2015

The calculation of affordability has been changed for 2015. On July 24, 2014, the IRS published Revenue Procedure 2014-37, which increases the affordability percentage from 9.5% to 9.56% of an individual’s household income. In other words, in 2015, if the employee’s share of self-only coverage is less than 9.56% of the employee’s household income, it is still considered “affordable” for purposes of the ACA and the individual will not be eligible for assistance with plan costs and premiums.

Caution Needed When Using Safe Harbor Methods

But be careful. Because it is difficult to predict an employee’s household income when planning premium contributions, many employers have relied on one of the three “affordability safe harbors” which are permitted under ACA regulations. These safe harbors allow employers to calculate affordability, and thus avoid paying penalties, based on the employee’s W-2 wages, their hourly rate of pay, or the federal poverty level. These safe harbors were not addressed by the IRS publication issued in July. That means that until further notice, when using an affordability safe harbor, employers should continue to use 9.5% in their calculations.

“Form W-2 Wages” Safe Harbor

An employer’s offer of coverage is considered “affordable” if the employee’s required share of the premium for employee only coverage under the least expensive plan that meets the minimum value standard does not exceed 9.5% of the employee’s W-2 wages for the calendar year in which affordability is calculated, as reported in Box 1.

This safe harbor is calculated at the end of the calendar year, using the employee’s actual wages and required premium contributions for that year. The employee’s premium contributions must be made consistently and periodically throughout the year. This requirement can make it difficult for the employer to calculate whether the safe harbor is met when the plan year begins. An employer using this safe harbor, at least for employees who work variable hours, may want to monitor compliance throughout the year.

“Rate of Pay” Safe Harbor

Hourly Employees. An employer’s offer of coverage is “affordable” under this safe harbor if the employee’s share of the monthly premium for employee-only coverage under the least expensive plan that meets the minimum value standard does not exceed 9.5% of the employee’s hourly rate, multiplied by 130. The employee’s hourly rate used is the rate in effect on the first day of the plan year. If the rate is lowered during the year, the calculation must be made separately for each month, meaning that the threshold for affordability could change during the year.

This safe harbor is not dependent upon actual hours worked—it can be used even if the employee actually works more or less than 130 hours in a calendar month.

Non-Hourly Employees. This is another variation of the “rate of pay” safe harbor where the employee does not have an hourly rate. The employer can use the same calculation as above, but instead of the hourly rate times 130, the employer multiplies 9.5% by the employee’s monthly salary (on the date coverage begins).

This safe harbor cannot be used if the employee’s monthly salary is reduced, for example, by a reduction in work hours. If work hours are reduced but the salary does not change, the safe harbor can be used.

“Federal Poverty Line” Safe Harbor

An employer’s offer of coverage is “affordable” if the employee’s share of the monthly premium for the least expensive self-only plan (which meets the minimum value standard) is not more than 9.5% multiplied by the Federal Poverty Line for a single individual, divided by 12.

For example—through the end of 2014, coverage is affordable for an employee living within the 48 contiguous United States or the District of Columbia if the employee’s premium contribution for the least expensive self-only plan is not more than $92.38.

Guidelines for Using Safe Harbors

Using safe harbors is optional. An employer may use one or more safe harbors for all employees or for a reasonable, bona-fide category of employees (such as job type, nature of compensation, or geographic location) as long it does so uniformly and consistently for the employees in a category.


If you have questions about the new affordability calculations or want to know more about using safe harbors, contact Bell Associate’s ACA experts at 203-707-1300 or email You can also visit us at

This article refers to regulations issued through July 24, 2014.  It is intended to be a summary of important issues and should not be considered legal or tax advice.

© Bell Associates and “Ask the Professionals,” 2014. Unauthorized use and/or duplication of this material without express and written permission from Bell Associates is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Bell Associates and “Ask the Professionals” with appropriate and specific direction to the original content.