Ensure ACA Compliance Year-round
Hello again,
This post is for Applicable Large Employers (ALEs) required to comply with the Affordable Care Act. We hope you find it useful.
The most notable ACA compliance update for 2024 is the annual affordability adjustment, which has dropped significantly, to 8.39%. A lower percentage means the employee’s contribution is also lower, so it’s a good idea to reassess whether employee premiums have crept above this threshold.
Affordable Care Act Safe Harbors are one of three accepted methods of estimating employee income, which in turn is the basis for applying that year’s affordability rate. For the 2024 tax year, that was 8.39%.
The IRS deems coverage to be affordable if it was available to a full-time employee for less than 8.39% of their income (9.02% for 2025). The more an employee earns (or is estimated to earn), the more they can afford and the less an employer may need to subsidize. The three Safe Harbors are:
– W-2 Wages. This is the most common and generally most advantageous to the employer. It is the employee’s W-2 Box 1 income. The key is that it considers all wage types, such as overtime, commissions, bonuses, and regular hours above and beyond the 130-hour minimum definition of full-time (FT).
– Rate of Pay. This is calculated using the lowest hourly rate paid to the employee during the year, normalized (multiplied) to the 130 hour/month FT threshold. Most FT employees work well in excess of 130 hours/month, plus have other bonuses, etc. In those cases, W-2 wages would result in a higher income.
However, the Rate of Pay does have 2 benefits:
– It is predictable. Assuming someone’s hourly rate doesn’t decrease during the year, on January 1st you know exactly what they can afford for the rest of the year. No surprises.
– There are rare situations where an employee has been determined to be FT and their hours decrease below 130 during a stability phase. If the person only averages 100 hours/month for the year (and has no commissions/bonuses) their W-2 Wages will decrease, but the Rate of Pay calculation is completely unaffected by how much an employee actually works—it is always normalized to 130 hours.
– Federal Poverty Level. The annual FPL for 2024 was $14,580. If you multiply by the 8.39% and divide by 12, the maximum monthly amount an employee can afford is just $101.94. That means that if the minimum hourly wage you pay is $9.35 or more, it will always be better to use the Rate of Pay than FPL Safe Harbor.
The affordability calculation is: (Safe Harbor annual wages) x .0839. To get a monthly figure you divide by 12 months (or whatever portion of the year the employee was with the company and considered full-time). Compare that to the monthly contribution amount on Line 15 of the 1095-C. The value on the form should be lower than the value calculated using the Safe Harbor.
*Remember that the Line 15 amount is the employee’s share of the least expensive employee-only plan that was available. It is what they could have paid, not what they are actually paying for a plan with greater benefits or whole family coverage.
Passport Software
It is essential to monitor and manage ACA data throughout the year to ensure compliance. The management of ACA compliance can become intricate, particularly for companies that employ variable-hour, seasonal, or temporary workers.
Passport Software’s IRS-certified ACA software simplifies the management of data to ensure compliance throughout the year. Our ACA software generates reports that notify when part-time employees are approaching full-time status and when coverage offers are necessary. Additionally, the software ensures that the coverage provided meets the affordability standards set by the IRS.
For those seeking a more streamlined approach, the Full Service option allows you to simply submit a spreadsheet containing employee data, and we will handle everything for you throughout the year, including filing.
We are IRS-approved to submit optional proxy filings on behalf of our ACA software clients. Passport Software also provides penalty response consultation services. We’ve helped many companies drastically reduce or avoid penalties.
To learn more about how our ACA software and services can ease the burden of compliance, call 800-969-7900. Or, contact us – we are here to help.