Safe Harbors Available to Help Employers Meet Affordability and Minimum Value Standards

We discussed in our April Health Care Reform update how companies with 100 or more employees can determine full-time status for their employees to meet next year’s reporting requirements of the Affordable Care Act (ACA). This month, we discuss what is considered an “affordable” and “minimum value” (MV) health plan and the safe harbors available to help employers meet the government requirements. If you are an employer with 100 or more employees, are you certain your health plan meets the Internal Revenue Service’s minimum threshold for affordability and MV? If not, continue reading.

What is considered an “affordable” health plan by the government?
Under the ACA, a health plan is considered affordable by government standards if the employee’s share for health coverage (premium or contribution) is no more than 9.5% of their annual household income.

How do you find out an employee’s annual household income?
Because it is difficult to determine an employee’s annual household income, the IRS provides some optional regulatory affordability safe harbors that are based on information you as an employer would have available. While large employers are required to offer coverage to employees and dependents, the coverage need only be affordable for employee only coverage.  Employers can require that employees pay for 100% of the cost of employee coverage; however, most employers do subsidize dependents coverage.  The following affordability calculations are based upon the cost of coverage for employees only (self-only coverage). 

The three safe harbors provided by the IRS are:

  • 9.5% of Form W-2 wages safe harbor:  the affordability calculation is based on the amount of wages that were paid to the employee as reported in Box 1 of the employee’s Form W-2.
  • 9.5 % of Rate of pay safe harbor:  the affordability calculation is based on what an employee’s rate of pay was at the start of the coverage period. Adjustments are allowed for an hourly employee if his or her rate of pay was decreased but not if it was increased.
  • 9.5 % of Federal poverty line safe harbor: coverage is considered affordable if an employee’s contribution does not exceed 9.5% of the federal poverty line for a single person for the applicable calendar year.

An employer must ensure coverage is affordable and meets minimum value.  Employees may be eligible for tax credits at a health insurance exchange if they are offered an employer health plan that does not meet MV standards even if it is affordable.

How do you know if your plan meets MV standards?
According to the ACA, minimum value (MV) means that your plan’s share of total allowed benefit costs provided under the plan covers at least 60 percent of those costs. The IRS and Health and Human Services (HHS) have three ways to determine if your health plan is considered minimum value:

  • certification from an actuary
  • minimum value calculator provided by the HHS
  • or design-based safe harbor checklists, provided below:

Option 1                            

Deductible: $3,500 integrated medical and drug deductible    

Cost Sharing: 80%                        

Maximum Out of Pocket Per Employee Cost Sharing: $6,000  

Option 2                            

Deductible: $4,500 integrated medical and drug deductible     

Cost Sharing: 70%                      

Maximum Out of Pocket:  $6,400    

Additional:   $500 employer contribution to a health savings account (HSA)

Option 3                            

Deductible: $3,500 medical deductible, $0 drug deductible    

Cost sharing: 60% medical plan cost sharing and 75% drug cost sharing    

Maximum Out of Pocket: $6,400    

Additional: Drug co-pays of $10/$20/$50 for the first, second and third prescription drug tiers, 75% co-insurance for specialty drugs


If you meet any of these requirements listed above, your health coverage will be considered affordable according to the Employer Shared Responsibility provisions regardless if your employee receives a tax credit or not.