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Applicable Large Employers, also known as “ALEs,” are employers that average 50 or more Full Time (FT) + Full Time Equivalent (FTE) employees, as of January 1^st annually, according to all 12 months of the preceding tax year. ALEs must comply with the ACA’s employer mandate.
 
Under this mandate, ALEs must offer affordable health insurance coverage – that provides Minimum Value (MV) of Bronze or better health plan coverage, and is at least Minimum Essential Coverage (MEC) – to all FT employees. ALEs must also offer at least MEC to FT employees’ dependent children up to age 26.
 
Calculating the “affordability” of employees’ health plans under the Affordable Care Act (ACA) is arguably one of the most challenging components of compliance for ALEs.
 
Setting Affordability at the Beginning of a Plan Year
ALEs should carefully evaluate and set the costs of employees’ health insurance plans before employees are offered their plans, in order to ensure compliance with the ACA’s employer mandate. An ALE that does not offer affordable coverage in accordance with the mandate can be penalized as much as $4,060 per FT employee in 2021.
 
Affordability is based on the lowest cost MEC/MV plan offered to the employee – at the “employee only” rate. It is not based on the plan the employee actually enrolls in; it is based on the lowest-cost MEC/MV plan offered to the employee by the ALE.
 
Additional rates for spouse or dependents are not considered in the affordability calculation. As long as the lowest-cost MEC/MV plan rate does not exceed a certain threshold percentage per year, based on any of the ACA’s three safe harbors, the plan is considered affordable. The affordability percentages for 2020 and 2021 are as follows:

• Affordability for plan years beginning in 2020 is 9.78%.
• Affordability for plan years beginning in 2021 is 9.83%.

 
Affordability is based on plan year, not calendar year. For example, a plan with a 12/1/2020 effective date will use the 9.78% ratio for 12/1/2020 – 11/30/2021. Then on 12/1/2021, the 9.83% ratio will be used through 11/30/2022.
 
ACA Affordability Safe Harbors for ALEs
The ACA allows employers to base affordability – according to the lowest cost (after-employer contribution) MEC/MV plan offered to employees – based on any of the following safe harbors:

• The employee’s Rate of Pay
• The employee’s corresponding W-2 Box 1 income for the corresponding year (generally as of the first day of the plan year)
• Federal Poverty Level (FPL)

 
Word & Brown General Agency has an exclusive ACA Affordability Calculator to assist ALEs when calculating affordability based on employees’ rates of pay and/or W-2 Box 1 income. Consult your Word & Brown representative, or refer to the Word & Brown website, for access to this calculator.
 
Safe Harbor Option 1 – Employee’s Hourly Rate of Pay
Employers calculate affordability under this scenario in one of two different ways, according to whether the employee is paid on an hourly or salary basis.
 
For salaried employees, ALEs can use employees’ actual monthly salaries as of the first day of the coverage period. That monthly amount is multiplied by the plan year’s affordability percentage threshold in order to determine the maximum monthly premium an employee can be charged for the plan, at the employee-only rate, under this safe harbor.
 
For hourly employees, affordability must be calculated using the employee’s rate of pay at the beginning of the plan year. However, the employer should make an adjustment to this calculation during the plan year if an employee experiences a decrease in pay. Furthermore, the employer must calculate an hourly employee’s rate of pay under this safe harbor at 130 hours/month, even if the hourly employee provides more than 130 hours of service per month – which is very common.
 
As a reminder, the ACA considers an employee to be FT if he or she averages 30 hours of service per week, or averages 130 hours of service per month.
 
Refer to Word & Brown’s Rate of Pay Affordability Reference Sheet for California Employers or for Nevada Employers for help in making this calculation for hourly employees at the 130 hours/month calculation.
 
Safe Harbor Option 2 – Employee’s W-2 Box 1 Income
ALEs utilizing this Safe Harbor can multiply a FT employee’s W-2 Box 1 income for the same corresponding tax year by the applicable ACA affordability percentage to determine affordability. This means ALEs determining affordability under this safe harbor will have to do so in advance of an employee actually earning his or her future W-2 Box 1 income.
 
ALEs desiring to set affordability under this safe harbor usually only do so for salaried employees with constant salaries that do not change throughout the year. However, it’s worth noting that W-2 Box 1 income generally excludes employee-paid taxes, and contributions to employee benefits plans [including 401(k), etc.] that may vary throughout the year.
Refer to Word & Brown’s exclusive ACA Affordability Calculator for help setting contributions according to this safe harbor; it is available on the Word & Brown website or through your Word & Brown representative.
 
Safe Harbor Option 3 – Federal Poverty Level (FPL)
ALEs can set contributions under this Safe Harbor by using the FPL that is in effect six months prior to the beginning of their plan year to set employee contributions in accordance with ACA’s affordability parameters.
 
As long as the employee’s lowest cost (after employer contribution) MEC/MV plan, at the employee only rate, does not exceed the ACA affordability threshold when applied against the FPL, the plan is considered affordable. Many ALEs desire to use this safe harbor method if they can afford to do so, because it greatly simplifies ACA reporting.
 
The federal poverty level in effect for plan years beginning January 1, 2021, through June 15, 2021, is $12,760.00/year or $1,063.33/month for a single person household. Under this safe harbor, a plan is considered affordable if the lowest-cost MEC/MV option, at the employee-only rate, does not exceed $104.52/month.
 
The Department of Health and Human Services (HHS) usually releases new FPL numbers in the early winter and summer months, and will likely release the FPL for plan years beginning July 1, 2021, around February 2021.