Under the United States’ final Pay or Play rules, an Applicable Large Employer (ALE) can face significant “part (a)” penalties if they do not offer Minimum Essential Coverage (MEC) to substantially all (95%) of their full-time employees. The penalty is ~$2,000 for every full-time employee minus 30 (penalty shown annualized and not indexed).
If an ALE offers coverage to substantially all full-time employees, they can still face penalties for full-time benefits, ineligible employees, and/or if the coverage they offer is “unaffordable” or is not at least a 60% minimum value plan. The “part (b)” penalty is ~$3,000 per full-time employee who receives subsidized Exchange coverage (penalty shown annualized and not indexed).
Affordability is based on household income, and household income reflects variables that are generally not known to an employer. As a result, the IRS introduced three affordability safe harbors for employers. Use of the safe harbors is optional, but if used, they must be applied on a uniform and consistent basis to a reasonable category of employees.
The three affordability safe harbors are:
(1) the W-2 safe harbor
(2) the Rate of Pay safe harbor
(3) the Federal Poverty Level safe harbor
Each safe harbor uses the statutory ~9.5% and annual, indexed percentages to determine the affordable employee contribution in a particular year. It is important to note that each safe harbor is based on the lowest cost minimum value plan at the employee-only tier of coverage. Affordability safe harbors offer a guarantee against part (b) penalties under Pay or Play based on unaffordability. For additional details, see An In-Depth Look at Affordability under Pay or Play.