If you offer health coverage, deciding whether it’s “affordable” under the ACA can feel like a moving target—wages change, hours fluctuate, and the rules update annually. That uncertainty makes it hard to set contribution strategies with confidence.
At Lift HCM, we help HR and payroll teams translate ACA rules into clear steps, pick the right affordability safe harbor, and document it so compliance isn’t guesswork.
In this article, you’ll learn what ACA affordability safe harbors are, how W-2, Rate of Pay, and Federal Poverty Level (FPL) methods work, what’s changed for 2025–2026, and how to choose—and defend—the right method for your workforce.
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Under the employer mandate (Internal Revenue Code 4980H), Applicable Large Employers (ALEs) must offer full-time employees affordable, minimum-value coverage—or potentially pay penalties.
The Challenge: Affordability is measured against the employee's household income, which employers typically don't know.
The Solution: The IRS provides three safe harbor methods that use employer-known data to test affordability:
These safe harbors don't change your plan—they standardize the math you apply to employee contributions and provide a defensible compliance position.
💡 Pro Insight: Safe harbors must be applied consistently within reasonable employee classifications (e.g., hourly vs. salaried, location-based, bargained vs. non-bargained).
The ACA employer shared responsibility provision, often called the “employer mandate” or “play or pay” rule, requires Applicable Large Employers (ALEs) to offer affordable, minimum-value health coverage to full-time employees and their dependent children.
Key Definitions:
The IRS may assess two types of penalties:
| Penalty Type | 2025 Amount | 2026 Amount | Trigger |
| 4980H(a) | $2,900/FTE* | $3,340/FTE* | Coverage not offered to 95% of full-time employees |
| 4980H(b) | $4,350/employee | $5,010/employee | Coverage unaffordle or lacks minimum value |
*After first 30 employees; penalties assessed monthly and annualized
📊 Industry Stat: IRS assessments for ACA non-compliance exceeded $2.8 billion in recent years, with most penalties stemming from affordability failures.
The FPL safe harbor uses the federal poverty guideline for a one-person household as the income benchmark. This is the simplest method because it doesn’t require employer-specific payroll data.
How it works: Affordable if self-only coverage is no more than 9.02% (2025) or 9.96% (2026) of the annual FPL, divided by 12.
Examples:
📆 Note on timing: The regulations allow use of the FPL in effect within six months before the first day of the plan year so employers can finalize rates ahead of open enrollment. This is why calendar-year 2026 plans use the 2025 FPL.
The Rate of Pay safe harbor bases affordability on the employee’s pay rate at the start of the plan year.
Examples (2025):
Key considerations:
The W-2 wages safe harbor uses the employee’s Box 1 wages from Form W-2.
How it works: W-2 wages ÷ 12 × affordability percentage = maximum affordable monthly contribution.
Example (2026): W-2 Box 1 wages $60,000 → 60,000 ÷ 12 × 9.96% = $498.00/month.
Key considerations:
Step 1: Assess Your Workforce
Step 2: Evaluate Administrative Capacity
Step 3: Calculate Financial Impact
Run scenarios for each method using your actual employee data:
Step 4: Document Your Decision
Create a written policy stating:
Q: What is the purpose of the Affordable Care Act (ACA) employer shared responsibility provision? A: The ACA employer shared responsibility provision, also known as the "employer mandate" or "play or pay," requires applicable large employers to offer health coverage to their full-time employees.
Q: When might an employer face penalties under the ACA employer shared responsibility provision? A: An employer may face penalties if a full-time employee receives a government subsidy for individual insurance through an Exchange (Marketplace) because the employer failed to offer adequate coverage. A large penalty applies if the employer did not offer coverage to at least 95% of full-time employees and their dependent children. A smaller penalty applies if coverage was offered, but it did not meet minimum value and affordability standards.
Q: How is "affordability" determined for health coverage under the ACA? A: Affordability is based on the employee contribution requirement for self-only coverage divided by the employee's income. The maximum allowable percentage is adjusted annually for inflation. For a plan year beginning in 2025, it's 9.02% of income, and for 2026, it's 9.96% of income.
Q: What are the three safe harbor methods employers can use to define income for affordability calculations? A: Since most employers don't have access to an employee's actual household income, the regulations allow employers to use one of three safe harbor methods: Federal Poverty Level (FPL), Rate of Pay, and W-2 Wages. These methods are optional, and different methods can be used for distinct classes of employees if applied uniformly.
Q5: Explain the Federal Poverty Level (FPL) safe harbor method. A5: The FPL safe harbor defines annual income as the federal poverty level amount for a single-member household, as determined by the Department of Health and Human Services (HHS). Most employers use the mainland FPL. For a calendar year plan beginning January 1, 2025, the FPL is $15,060. For a plan beginning on or after February 1, 2025, the FPL is $15,650. The employee's actual earnings are not relevant with this method.
Q: How does the Rate of Pay safe harbor method work for salaried and hourly employees?A: For salaried employees, the rate of pay is their monthly salary, provided it's not reduced. For hourly employees, it's their hourly rate multiplied by 130 hours per month, regardless of actual hours worked. This method should not be used for tipped or commissioned employees and does not require monitoring actual earnings or hours, as long as the hourly rate does not decrease.
Q: What is the W-2 Wages safe harbor method? A: Under the W-2 Wages method, income is defined as the amount reported in Box 1 of the employee's Form W-2 for the current year. It's important to note that pre-tax Section 125 contributions and 401(k) or 403(b) deferrals are not included in Box 1, which may understate actual income. While usable for both hourly and salaried employees, the rate of pay method is generally recommended for hourly employees.
Q: What factors should an employer consider when deciding which safe harbor to use? A: Employers should consider their budget, support for payroll and benefits administration, base salary for the lowest-paid employees (hourly and salaried), hourly employee turnover, and the work patterns of hourly employees (e.g., consistent 40 hours, 30 hours, busy seasons with overtime). If multiple health plan options are offered, only the lowest-cost option available to full-time employees needs to be tested.
Q: How is affordability calculated for an employee who was not employed for the full calendar year? A: For employees not employed for the full year, affordability is determined by multiplying their W-2 wages for the year by a fraction. This fraction is the number of calendar months the employee was offered coverage divided by the number of months the individual was actually employed during the year.
Q: Are there any special considerations for wellness programs or flex credits related to affordability? A: Wellness program rewards that reduce employee contribution rates are generally disregarded in the affordability test, except for programs related to tobacco use. In such cases, assume all employees qualify for the reward before determining affordability. Flex credits or cash-in-lieu benefits may impact affordability, and employers with cafeteria plans offering these options should consult legal counsel.
In the past, ACA affordability rules left many employers confused—percentages shifted each year, safe harbor choices seemed unclear, and the risk of costly IRS penalties created constant anxiety.
Now, you have a clear understanding of the ACA affordability standard, how the three IRS safe harbors work, and how to handle special cases and reporting requirements. You know the factors that matter most when selecting the right method for your workforce.
Looking ahead, the right approach to affordability compliance isn't just about avoiding penalties—it's about protecting your budget, supporting your people, and giving your HR team confidence. With proactive planning and solutions like those we have available at Lift HCM, you can stay compliant, reduce risk, and focus on what matters most: building a thriving business and caring for your employees.
Download our Guide, Understanding Affordability and Safe Harbors, which details the ACA’s employer shared responsibility rule and provides guidance on determining whether the health coverage you offer full-time employees meets affordability requirements.