Select Page

Continued from Day 10


Does Jerry’s Plan meet Affordability?

Let’s Recap our Example from yesterday:  Jerry’s Eurosport is a automotive dealer with 3 locations and 130 true Full-Time Employees. Jerry’s offers a health plan to all of its Full-Time employees & the plan meets both Minimum Essential & Minimum Value Standards. Jerry’s lowest cost Minimum Value Health plan costs the employees $86 per Bi-Weekly Pay-Period.  Jerry’s has 100 Employees who make over $40,000; 10 employees between $30,000 and $40,000; and 20 employees who make below $30,000.


Affordability has 3 different tests, a.k.a. “Safe Harbors”

“Form W2” Safe Harbor:

  • I consider this the most complicated and the riskiest math you can use.
  • This method uses current year W2, therefore you can’t judge the outcome until after the end of the plan year.
  • W2 wages at the end of the year could be reduced by unpaid time off and items like pre-tax healthcare, FSA’s, HSA contributions, and retirement contributions.
  • The 2017 threshold for affordability is 9.69% of the employees W2 wages.
  • For Jerry’s Eurosport to use this method, they would be subject to penalty “B” for all employees under $24,000 who receive a subsidy.
    • Of the 20 possible employees in our example, let’s assume 8 of them receive a subsidy and had W2 wages under $24,000.
    • 8 x $3,390 = $27,120 in fines

“Rate of Pay” Safe Harbor:

  • This method allows an employer to make accurate assumptions.
  • For hourly employees, the law requires the employer to figure affordability based on 130 hours per month.
    • This is not tested on a 40 hour work week.
  • This method allows for each month to be counted separately for affordability criteria.  Mid-Year reduction in hourly rate would be the biggest danger here.
  • Regulations comment that this safe harbor is not practical for tipped employees or for employees who are compensated solely on the basis of commissions.
  • For Jerry’s Eurosport to use this method, the $86 bi-weekly rate would be a monthly $114.76 threshold.
    • On a rate of pay @ 9.69%, that would hit any employee under $9.15 per hour.
    • Of the 10 employees, let’s assume only 2 employees of the 20 who make wages lower than $30,000 would be set at a rate of pay below $9.15 per hour.
    • 2 x $3,390 = $6,780 in fines.
      • While not a huge penalty, this scenario could be avoided by either lowering the payroll deduction rates overall or by raising wages for these few employees in this example.

“Federal Poverty Line” or “FPL” Safe Harbor:

  • For Tipped Employees,  this is my favorite and safest method to use when setting your payroll deduction rates.
    • Actually, this is absolutely my favorite method, as it takes away all questions and you can rest easy.
  • For 2017, the Federal Poverty Line most likely wont be set until late January 2017—too late for your 2017 plan offering.
    • It’s best to use the current 2016 FPL set at $11,880, when creating your 2017 Payroll Deductions
  • For your 2017 offering,  any Employee Only payroll deductions under $95.93 per month will meet this criteria
    • $44.28 Bi-Weekly
    • $47.97 Semi-Monthly
    • $22.14 Weekly
  • For Jerry’s Eurosport from our example, this really wasn’t applicable as the employees all made too much to be concerned with this level, and keeping their payroll deductions at $86 is actually very appropriate and “affordable”.


Think back to our 1st example from Tip #10 —Tom’s King of Wings.

  • Because they have a high volume of tipped employees, they would want to consider the FPL Safe Harbor when starting a plan.
  • We find that with companies like Tom’s King of Wings, it is always cheaper to offer coverage than pay a fine.


Tom's King of Wings

Wait,  How is it Cheaper for Tom’s King of Wings to offer coverage?

Stay Tuned:  Tomorrow we help Tom figure out how to save money on that $305,100 Penalty.  

Bret Brummitt

Bret Brummitt

Senior Consultant

About the author: An avid learner and resourceful leader with a passion for problem solving, Bret is a calming force in the chaos and fast paced evolution of health insurance, employee benefits, and the growing burden of regulatory compliance. He helps people develop the confidence to see beyond the problem at hand and start to re-imagine their goals. Whether he’s helping a client or a colleague, Bret believes a successful interaction is one that allows us all to dream a little bigger when we’re done.

About AG Insurance: AG Insurance ( helps employers and their employees with solutions focused on positive organizational impact and improved employee experiences.