How Do Employers Determine Affordable Health Insurance?

Under the Affordable Care Act's employer mandate, large employers (those with 50 or more full-time equivalent employees) must offer health insurance to their full-time (30+ hours per week) employees or face a financial penalty.

There's wide latitude in terms of the coverage that large employers can offer, but in order to comply with the employer mandate, the coverage has to provide minimum value and be considered affordable for the employee.

Minimum value just means that the plan covers at least 60% of average medical costs for a standard population, and provides "substantial coverage" for inpatient care and physician services (note that minimum value is not the same thing as minimum essential coverage, but all employer plans are considered minimum essential coverage, regardless of the benefits they provide).

But affordability is a more subjective measure since it depends in large part on a person's income. How do employers and the IRS determine whether a plan is affordable for the employees?

This article will explain how the affordability determination is made, and what options you have if the coverage that's offered to you isn't considered affordable.

Employers Use Safe Harbor Calculations

The IRS considers an employee's coverage affordable as long as the employee's portion of the premiums for self-only coverage doesn't exceed 9.61% of the employee's household income in 2022 (this percentage is indexed for inflation each year; it started out at 9.5% in 2014 and has fluctuated since then, both up and down).

It's important to understand the "self-only" portion of that definition. The cost to add family members to the employee's plan is not taken into consideration when affordability is determined. All that counts is what the employee has to pay for just their own coverage.

Unfortunately, the family members aren't eligible for premium subsidies in the individual market if they have access to coverage under the employer-sponsored plan that's considered affordable for the employee, regardless of how much it would cost to add the family to the employer-sponsored plan. This is known as the family glitch.

Although the American Rescue Plan has made substantial improvements to the affordability of self-purchased health insurance, it did not change anything about how affordability is determined for employer-sponsored plans, nor did it affect the family glitch.

However, the Biden administration is working on a fix for the family glitch that's expected to be in place by 2023. This will make some employees' families newly eligible for premium tax credits in the marketplace. But the proposed rule change won't solve the problem for all families caught by the family glitch, since affordability will be determined separately for the employee and their family members (as opposed to only considering the family as one unit and offering premium tax credits to the whole family if the family's total cost for employer-sponsored health insurance isn't considered affordable).

For 2022, the affordability determination is fairly straightforward: if the coverage your employer offers will cost you more than 9.61% of your household income in 2022 to cover just yourself, it's not considered affordable. In that case, you would have access to premium subsidies in the exchange if you want to buy an individual market plan instead.

And if your employer has 50 or more employees, they would potentially be subject to the employer mandate penalty. (There is no penalty for small employers that offer unaffordable coverage, but their employees would still have access to premium tax credits in the marketplace if the coverage offered is considered unaffordable.)

Safe Harbors for Employers

But how does your employer know your household income? If you work full-time for a large employer and your coverage ends up being unaffordable when compared with your household income, your employer is on the hook for a penalty, which can be substantial. And yet, employers typically don't have access to data regarding their employees' total household income.

To address this problem, the IRS created three "safe harbor" calculations that employers can use. As long as the employer offers minimum value coverage that is considered affordable using one of the safe harbor methods, the employer won't have to worry about potential penalties. 

• W2 wages safe harbor. To use this method, the employer has to make sure that the employee's total health insurance premium costs throughout the year don't exceed 9.61% of the employee's W2 wages in 2022. They can set the employee's premium contributions as a dollar amount per pay period or a percentage of income (which could vary, if the employee's income varies), but there are restrictions on adjusting the contributions mid-year to account for a change in income. So this method is best for employees who have consistent wages throughout the year.
• Rate of pay safe harbor. To use this method, the employer looks at the employee's hourly wage as of the start of the plan year (or the lowest hourly wage the employee receives during a given month), multiplies it by 130, and calculates 9.61% of that total. This result will be the maximum amount that the employee can be required to pay for health coverage for the month. The 130-hour calculation is used regardless of how many hours the employee works, since that's the minimum definition for full-time work.
  In the case of salaried workers, the rate of pay safe harbor method just requires the employer to ensure that the employee's premium cost doesn't exceed 9.61% of the employee's monthly salary.
• Federal poverty level safe harbor. This safe harbor method results in the same maximum required premium contribution for every employee, since it's based on the federal poverty level, rather than on each employee's income. To use this method, your employer just has to ensure that your premium costs don't exceed 9.61% of the federal poverty level.
  For 2022, the federal poverty level in the continental U.S. is $13,590 (for a single individual, which is what this calculation uses; note that the amount is higher in Alaska and Hawaii). So if your employer uses this safe harbor, your total premium costs for your coverage in 2022 cannot exceed $1,306—or $109 per month. This safe harbor level will generally result in the lowest possible level of premiums that employees will have to pay for their coverage since most full-time workers earn more than the federal poverty level.

How Does the IRS Know Which Safe Harbor Method My Employer Used?

Your employer files a report at the beginning of each year with the IRS (and sends you a copy), detailing the coverage that was offered to you during the prior year. This is Form 1095-C.

On line 16 of that form, your employer will enter a code to clarify which safe harbor method (if any) was used. The codes are explained in the employer instructions for Form 1095-C: Code 2F means the W2 wages safe harbor was used; Code 2G means the federal poverty level safe harbor was used, and 2H means the rate of pay safe harbor was used.

Additional Household Income Is Not Counted in the Safe Harbor Methods

Since your employer only has access to your portion of your household's income, that's all that will be taken into consideration if your employer uses a safe harbor calculation. And if the federal poverty level safe harbor method is used, it's based on the poverty level for just one person. If your spouse has additional income, that's not counted when your employer ensures that your premiums don't exceed 9.61% of your income.

Employers are not required to use a safe harbor calculation. But the penalties for failing to comply with the employer mandate are fairly steep, and employers that are offering coverage generally don't want to end up inadvertently offering coverage that doesn't meet the affordability guidelines.

Summary

In 2022, employer-sponsored health insurance is considered affordable if the cost for employee-only coverage (ie, not including the cost to add family members) is no more than 9.61% of the employee's household income.

Large employers (who can be subject to financial penalties if the coverage they offer isn't considered affordable) can use one of three safe-harbor methods to ensure that the coverage they offer to employees will be considered affordable.

If coverage is considered affordable, the employee is not eligible for premium tax credits in the marketplace/exchange. And through 2022, their family members are also ineligible for premium tax credits, assuming that the family is eligible for coverage under the employer-sponsored plan (regardless of how much it would cost). The Biden administration is working on a partial fix for this "family glitch" that is expected to take effect as of 2023.

A Word From Verywell

If you work full-time for a large employer, you're probably offered health insurance that is fairly inexpensive for your own coverage, since employers generally want to ensure that they're in compliance with the ACA's employer mandate. But the premiums may be much larger if you add family members to your plan since employers are not required to make the coverage affordable just for you, not for your family. If you're facing unaffordable family health insurance premiums, your family may end up being newly eligible for premium tax credits in the marketplace as of 2023, thanks to the rule change that the Biden administration has proposed.