The Afford­able Care Act’s employ­er shared respon­si­bil­i­ty pro­vi­sion — often called the employ­er man­date or “play or pay” — requires large employ­ers to offer health cov­er­age to their full-time employ­ees or face a poten­tial penal­ty. (Employ­ers with few­er than 50 full-time and full-time-equiv­a­lent employ­ees are exempt.) Large employ­ers can avoid the risk of any play or pay penal­ties by offer­ing all full-time employ­ees at least one group health plan option that meets two stan­dards: It pro­vides min­i­mum val­ue and it is afford­able.

Min­i­mum val­ue means the plan’s share of total allowed costs is at least 60 per­cent and the plan pro­vides sub­stan­tial cov­er­age of physi­cian ser­vices and inpa­tient hos­pi­tal services.

Afford­able means the employee’s required con­tri­bu­tion (pay­roll deduc­tion) for self-only cov­er­age, if elect­ed, does not exceed a cer­tain per­cent­age of the employee’s house­hold income. The afford­abil­i­ty per­cent­age changes slight­ly each year based on the law’s index­ing rule. For 2021, the per­cent­age is 9.83 per­cent. For 2022, how­ev­er, the per­cent­age decreas­es to 9.61 per­cent.

Although the change is minor, it means that employ­ers need to con­sid­er whether their plan’s employ­ee-only con­tri­bu­tion rate will still meet the afford­abil­i­ty stan­dard next year.

Determining Affordability

The first step in deter­min­ing whether a group health plan option is afford­able is to define the employee’s “income.” Employ­ers do not know their work­ers’ total house­hold income, so the play or pay rules offer employ­ers three option­al safe har­bor meth­ods to define income using infor­ma­tion known to the employ­er. Employ­ers may use any of the safe har­bor meth­ods. They also may use dif­fer­ent meth­ods for dif­fer­ent class­es (such as one method for hourly employ­ees and anoth­er method for salaried employ­ees), pro­vid­ed that the cho­sen method is applied uni­form­ly to all employ­ees in the class.

The three IRS safe har­bor meth­ods are:

  1. Fed­er­al Pover­ty Line (FPL)

The FPL method is the eas­i­est of the three meth­ods. Mul­ti­ply the main­land FPL amount for a sin­gle-mem­ber house­hold by the afford­abil­i­ty per­cent­age, then divide by 12. As long as the self-only con­tri­bu­tion rate does not exceed the result­ing amount, the plan’s cov­er­age is deemed afford­able. For instance:

  • 2021: ($12,760 x 9.83%)/12 = $104.52 per month
  • 2022 ($12,880 x 9.61%)/12 = $103.15 per month

The FPL chart is updat­ed every year in late Jan­u­ary. For 2022 cal­en­dar-year health plans, the employ­er needs to refer to the cur­rent FPL amount ($12,880) since the new FPL amount will not be avail­able until after the plan year starts. If the health plan year starts Feb­ru­ary 1, 2022 or lat­er, how­ev­er, the employ­er may refer to the new FPL amount which like­ly will be a lit­tle higher.

2. Rate of Pay

This is the most con­ve­nient method to define income when applied to hourly employ­ees. Mul­ti­ply the employee’s hourly rate of pay times 130 hours per month (regard­less of how many hours he or she actu­al­ly works), then mul­ti­ply by the afford­abil­i­ty per­cent­age. As long as the self-only con­tri­bu­tion rate does not exceed the result­ing amount, the plan’s cov­er­age is deemed afford­able. For instance:

  • 2021: ($11* x 130) x 9.83% = $140.57 per month
  • 2022: ($11* x 130) x 9.61% = $137.42 per month

* Replace $11 with the hourly employee’s rate of pay.

For salaried employ­ees, the rate of pay method is some­what com­pli­cat­ed so employ­ers gen­er­al­ly avoid using this method for non-hourly employees.

3. W‑2

The W‑2 method requires using cur­rent W‑2 wages instead of look­ing back at the pri­or year. W‑2 wages means the amount that will be report­ed in Box 1 of Form W‑2. Pre­tax con­tri­bu­tions, such as § 125 plan con­tri­bu­tions and 401(k) or 403(b) plan defer­rals, are not includ­ed in Box 1, so using the W‑2 safe har­bor method may under­state the employee’s actu­al income. Cov­er­age will be deemed afford­able if, for each month of the plan year, the self-only con­tri­bu­tion does not exceed the Box 1 amount mul­ti­plied by the afford­abil­i­ty percentage.


Large employ­ers can avoid the risk of poten­tial penal­ties under the ACA’s play or pay rules by ensur­ing that they offer full-time employ­ees at least one min­i­mum val­ue plan option that also is afford­able. Afford­able means the employee’s con­tri­bu­tion to elect self-only cov­er­age would not exceed a cer­tain per­cent­age of the employee’s income.

The per­cent­age used to deter­mine afford­abil­i­ty changes from year to year is based on the law’s index­ing for­mu­la. For 2021 plan years, the afford­abil­i­ty per­cent­age is 9.83 per­cent, but it decreas­es to 9.61 per­cent for 2022 plan years. Employ­ers and their advi­sors will want to keep this infor­ma­tion in mind as they final­ize their group health plan offer­ings and employ­ee con­tri­bu­tion rates for 2022.

By Kath­leen A. Berg­er, CEBS

Orig­i­nal­ly post­ed on Min­er­al