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.