The IRS regulations for ACA reporting require an employer to show that they offered the ‘right type of plan’ at the ‘right type of cost’ or else face penalties. This means that an employer must have offered minimum essential coverage and minimum value coverage at a cost no greater than 9.5% of the employees household income.
Problem! When you hired an employee you didn’t hire their whole household, so how are you to know what that number actually is? To deal with this issue the IRS allows for employers to make assumptions on what the household income is for an employee. It is important to note however, the Affordability Safe Harbor MUST work for everyone within a class of employees in order to use it. Lets take an example …
Example: The employer has a class of hourly employees that they are applying the rate of pay safe harbor for affordability purposes. There are 100 employees in this class. The safe harbor works for 99 of the employees but does NOT work for 1 person. This safe harbor cannot be used for ANY employees in this class. Instead, line 16 of their form 1095-C would simply be left blank and the IRS would use the final, actual household income of the employee to determine if a penalty could apply.
Of course for our clients, we perform all of this analysis on their behalf. If by chance you used a different vendor for reporting and need assistance, we can assist you through our consulting services.
To see specifically where this information and guidance comes from, you can visit this link here to see the Federal Register Vol.79, No.29. On page 57 of this document you will find the following language:
(i) Conditions of using an affordability safe harbor. An applicable large employer member may use one or more of the affordability safe harbors described in this paragraph (e)(2) only if the employer offers its full-time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan that provides minimum value with respect to the selfonly coverage offered to the employee. Use of any of the safe harbors is optional for an applicable large employer member, and an applicable large employer member may choose to apply the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. Reasonable categories generally include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable category.