It is important for Applicable Large Employers (ALEs) to determine the affordability of their health insurance in order to avoid penalties under the ACA’s Employer Shared Responsibility provisions. Coverage is considered “affordable” if the employee’s required contribution for self-only coverage is 9.5% (adjusted annually) of the employee’s household income for the year. The IRS recognizes that employers often do not know the household income of their employees and provides three optional safe harbors that a company can use to determine affordability: federal poverty level, rate of pay and/or W-2 method. While not required to use one of the affordability safe harbors, ALEs will have a much easier argument that coverage is affordable when responding to a penalty letter if there is a safe harbor to reference.
