Employer’s Guide to Understanding ACA Affordability Safe Harbors

Each year, the IRS announces annual inflation adjustments to the threshold used to determine whether employer-provided coverage qualifies as “affordable” under ACA* rules.

Employers with non-calendar year plans should keep in mind that because ACA reporting follows the calendar year, rather than the plan year, two different required contribution percentages apply when rates change during the calendar year. The chart below shows the year-to-year changes in the percentage used to calculate affordability.

Plan Year

Affordability Percentage















Source: Rev. Proc. 2014-37, Rev. Proc. 2014-62, Rev. Proc. 2016-24, Rev. Proc. 2017-36, Rev. Proc. 2018-34, Rev. Proc. 2019-29 and Rev. Proc. 2020-36


The ACA considers a plan affordable when the employee’s cost of coverage for the lowest-cost employee-only plan available is no more than 9.5% of an employee’s household income. This percentage is updated every year to account for inflation – the rate for plan years beginning in 2021 is 9.83%. (Note that other factors could affect the employee’s cost of coverage, including certain HRA contributions, wellness program incentives, flex credits, and opt-out payments.)

Safe Harbors

Because employers do not typically know their employees’ household income, the law offers three alternative methods for calculating a plan’s affordability, called safe harbors. Employers report affordability safe harbors (Form W-2, Rate of Pay, or Federal Poverty Level) on Line 16 of Form 1095-C.

Form W-2 Safe Harbor

To use this safe harbor, multiply the applicable affordability percentage by the wages listed in Box 1 of the employee’s Form W-2. If the annual employee-paid cost of coverage of the lowest-cost employee-only plan is equal to or lower than the calculated amount, the coverage is considered affordable. Employers should note that because this method uses the current year’s wages, they may not know if the coverage they offered was affordable until the end of the year. To use this safe harbor, the employee’s contribution must remain a consistent amount or consistent percentage for the entire plan or calendar year.

Federal Poverty Line (FPL) Safe Harbor

Using the FPL safe harbor can simplify affordability calculations; this is the easiest safe harbor to administer because it does not have to be calculated employee by employee. The applicable affordability percentage is multiplied by the FPL for a single individual and this total is compared, again, to the employee-paid cost of coverage for the lowest-cost employee-only plan. If the annual employee contribution is equal to or lower than the FPL calculation, the plan is considered affordable.

Rate of Pay Safe Harbor

For salaried employees, calculate Rate of Pay safe harbor by multiplying annual salary at the start of the plan year by the applicable affordability percentage. Compare that to the employee-only annual required contribution for the lowest cost plan available. Rate of Pay safe harbor cannot be used for a salaried employee whose salary is reduced during the plan year.

For hourly employees, calculate Rate of Pay safe harbor month by month by using the lower of 1) the hourly rate of pay on the first day of the plan year, multiplied by 130, multiplied by the applicable affordability percentage or 2) the lowest hourly Rate of Pay during the calendar month multiplied by 130, multiplied by the applicable affordability percentage. A short cut with the rate of pay safe harbor is to start with the lowest-paid employee and run the calculation for that person – if it is affordable for the lowest paid employee, it will be affordable for all those making more money and you will know that you can use the safe harbor for all employees.

Different safe harbors can be used for different employees, but only for IRS allowed categories, which are:

  •          Salaried versus hourly employees;
  •          Employees who work in different states;
  •          Collectively bargained versus non-bargained employees; or
  •          Each group of collectively bargained employees covered by a different agreement.

We’re Here to Help

For more information about calculating affordability or other benefits compliance topics, contact American Fidelity Administrative Services. AFAS is staffed with professionals who have extensive expertise in providing benefit plan consulting and compliance review. We empower our clients to make smart benefits decisions and deliver tools that can help save them time, energy, and money.

*Patient Protection and Affordable Care Act

**Internal Revenue Service