Affordability Safe Harbors: the W-2 method (3 of 3)


The IRS recently updated the affordability percentage to 9.78% for plan years that begin on or after Jan 1, 2020. As a reminder, this percentage is used by employers subject to the employer mandate to determine whether or not the employer’s coverage is considered affordable for an employee.


There are 3 affordability safe harbors an employer may use to determine whether or not coverage is “affordable” for an employee. The 3 safe harbors include:

  1. Rate of pay

  2. Federal Poverty Level (FPL)

  3. W-2 

Let’s look closer at the W-2 method:  This method is the trickiest to implement but can yield a higher employee contribution than the other two methods.


Whether coverage is affordable or unaffordable under the W-2 method depends on the amount of each employee’s Box 1 W-2 income, which wouldn’t be known until the end of the calendar year and could fluctuate during the year. For instance, an employee’s Box 1 income includes bonuses and tips, but wouldn’t include pre-tax salary reductions, 401k contributions, FSA contributions, or HSA contributions. Therefore, when an employer sets the employee contribution for the lowest-cost plan for self-only coverage, based on W-2 Box 1 income, it’s not known for sure if coverage is actually affordable for all full-time employees until the calendar year is over.


For an employer to rely on this safe harbor, the employee’s contribution has to stay at a consistent dollar amount or consistent percentage of all W-2 wages during the calendar year, or for those with non-calendar year plans, within the portion of each plan year during the calendar year.


For example, the employee contribution for self-only coverage is $160 per month. For 2020, an employee’s Box 1 W-2 wages are $20,800. Because the self-only contribution for 2020 is less than 9.78% of this employee’s W-2 wages for 2020 (20,800 x 9.78% = $169.52), the coverage offered is treated as affordable for the employee for 2020.


Now, a contribution that is based on a consistent percentage of W-2 wages would likely fluctuate based on the employee’s wages throughout the plan year. With this option, the employer could set a dollar limit so those with higher wages aren’t charged an excessive amount.


As an example, an employer could set the self-only premium at 9.78% of each eligible employee’s W-2 wages for the month, not to exceed $160 per month.


Thus, because the W-2 safe harbor is based on earnings for the current year, it is probably most useful when the employees’ W-2 earnings are relatively stable.

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