By Danielle Capilla
Chief Com­pli­ance Offi­cer at Unit­ed Ben­e­fit Advisors


How is PPACA’s “IRS Form W‑2 safe har­bor” regard­ing afford­abil­i­ty calculated?


Under PPACA, cov­er­age is con­sid­ered afford­able if it costs less than 9.5 per­cent of an employ­ee’s house­hold income. Because employ­ers are often unaware of an employ­ee’s house­hold income, there are three safe har­bors that an employ­er can use to deter­mine afford­abil­i­ty. One is the “IRS Form W‑2 safe har­bor,” and under it cov­er­age is afford­able if the employ­ee’s con­tri­bu­tion for self-only cov­er­age is less than 9.5 per­cent of his W‑2 (Box 1) income for the cur­rent year. Box 1 reports tax­able income and might be arti­fi­cial­ly low for an indi­vid­ual with high 401(k), 403(b) or Sec­tion 125 defer­rals, or who takes unpaid leave. There are no adjust­ments to account for this.

Employ­ers using the W‑2 safe har­bor may not change an employ­ee’s con­tri­bu­tion lev­el (dol­lar amount or per­cent­age) dur­ing the cal­en­dar year, or the plan year for non-cal­en­dar year plans.

If the employ­ee is only offered cov­er­age for part of a year, an adjust­ment to W‑2 income is made by mul­ti­ply­ing the IRS Form W‑2 wages by a frac­tion equal to the num­ber of cal­en­dar months for which cov­er­age was offered over the num­ber of cal­en­dar months in the employ­ee’s peri­od of employ­ment dur­ing the cal­en­dar year. (If cov­er­age is offered for at least one day dur­ing the cal­en­dar month, or the employ­ee is employed for at least one day dur­ing the cal­en­dar month, the entire cal­en­dar month is count­ed in deter­min­ing the applic­a­ble fraction.)

The W‑2 safe har­bor is con­sid­ered the most flex­i­ble, but it is cal­cu­lat­ed at the end of the year, which does not give an employ­er the abil­i­ty to make nec­es­sary adjust­ments. It has short­com­ings for employ­ees with sig­nif­i­cant pre-tax deduc­tions or who take unpaid leave.
Employ­ers may use dif­fer­ent safe har­bors for dif­fer­ent employ­ee groups, so long as the employ­ee groups are based on rea­son­able clas­si­fi­ca­tions such as hourly or salaried employ­ees, geo­graph­ic loca­tion, and job category.

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