If certain conditions are satisfied, an applicable large employer may use one or more of the three affordability safe harbors to determine if it’s offering affordable coverage under the ACA.  There are substantial limitations and risks associated with each safe harbor.

The federal poverty level safe harbor requires just one calculation. Under this safe harbor, coverage is affordable if the employee’s monthly cost for self-only coverage under the plan does not exceed the federal poverty level for a single individual.  The employer can ignore the employee’s actual hours and wages, which is very helpful when calculating premiums for a workforce with fluctuating schedules and compensation.  But, the federal poverty level safe harbor often results in high cost sharing by the employer and relatively low premiums for employees.

Under the W-2 safe harbor, an employer looks at each employee's W-2 for the calendar year (as reported in Box 1).  To be affordable, the employee's required premiums for the employer’s lowest-cost self-only coverage cannot exceed 9.66% (for 2016) of that employee’s W-2 wages.  This requires a retrospective analysis of each employee’s W-2 wages.  In other words, you don’t know whether you passed the test until it’s too late.  Alternatively, an employer could attempt to use the W-2 safe harbor at the beginning of the year by setting premium rates which would ensure that employee contributions would fall below the required threshold.  However, it’s very risky to set employee contribution rates based on W-2 wages that cannot be determined until after the end of the year, especially for employees with fluctuating schedules and income.

The third method, rate of pay safe harbor, avoids the retrospective analysis of each hourly employee’s W-2 wages because it allows you to assume a rate of 130 hours per calendar month times the employee’s hourly rate of pay.  To be affordable, the employee's required premiums for the employer’s lowest-cost self-only coverage cannot exceed 9.66% (for 2016) of that rate (i.e., 130 hours times the employee’s hourly rate of pay).  However, if an employee’s hourly rate of pay is reduced during the year, there are significant limitations on the use of this safe harbor and the calculation of employee premiums. Further, the rate of pay safe harbor is not available for any month that a non-hourly employee’s compensation is reduced, including due to a reduction in work hours. Also, as a practical matter, rate of pay safe harbor cannot be used for tipped employees, commissions or similar compensation arrangements where income fluctuates on a monthly basis.

There are certain strategies that can help make these safe harbors more useful and less risky for employers. Several factors need to be evaluated by each employer depending on the size of and type of its workforce, classification and categories of employees, geographical location of employees, and whether it’s a party to any collective bargaining agreements.