Does the variation in number of hours worked per week affect the “Rate of Pay” calculation to determine affordability under the ACA?
Question: When an employer is using the “Rate of Pay” safe harbor method for determining affordability under the employer shared responsibility provision of the Affordable Care Act, if a group of employees earn the same hourly rate, but some work 30 hours per week, and some 40 hours per week, does the fact that those working 40 hours are earning more affect the calculation to determine affordability?
Answer: There are various safe harbor methods an employer can use to determine if the plan is affordable. According to the IRS and Treasury, the rate of pay safe harbor is a design-based safe harbor that should be easy for employers to apply and allows them to prospectively satisfy affordability without the need to analyze every employee’s wages and hours. As a result, the employer does not need to do separate calculations based on the actual number of hours an employee is expected to work. The calculation will NOT change based on hours actually worked for benefits eligible employees.
The rate of pay safe harbor is based on the hourly rate multiplied by 130 hours for any benefits eligible employee regardless of the hours the person actually works. Keep in mind that under the employer mandate, benefits must be made available to full time employees which are defined as those working at least 30 hours per week on average. The 130 hours is the benchmark for full-time status of at least 30 hours per week for 1 month (4.33 weeks). The safe harbor assumes the minimum amount of hours actually worked at 30 hours per week, which is equal 130 hour per month (30 hours x 4.33 weeks). For salaried employees, monthly salary is used instead of hourly rate multiplied by 130.
Source: January 2, 2013 edition of the Federal Register (see page 235).
Proposed Rule, Section 26 Code of Federal Regulations, Parts 1, 54 and 301
Shared Responsibility for Employers Regarding Health Coverage
b. Rate of Pay Safe Harbor Notice 2011–73 requested comments on other possible safe harbor methods for determining the affordability of employer-sponsored coverage for purposes of section 4980H(b). Several commenters suggested a safe harbor that is based on a rate of pay (either the employer’s lowest rate of pay or each employee’s individual rate of pay). In response to these comments, the proposed regulations provide a rate of pay safe harbor under which the employer would (1) take the hourly rate of pay for each hourly employee who is eligible to participate in the health plan as of the beginning of the plan year, (2) multiply that rate by 130 hours per month (the benchmark for full-time status for a month under section 4980H), and (3) determine affordability based on the resulting monthly wage amount. Specifically, the employee’s monthly contribution amount (for the self-only premium of the employer’s lowest cost coverage that provides minimum value) is affordable if it is equal to or lower than 9.5 percent of the computed monthly wages (that is, the employee’s applicable hourly rate of pay × 130 hours). For salaried employees, monthly salary would be used instead of hourly salary multiplied by 130. An employer may use this safe harbor only if, with respect to the employees for whom the employer applies the safe harbor, the employer did not reduce the hourly wages of hourly employees or the monthly wages of salaried employees during the year. The rate of pay safe harbor is a design-based safe harbor that should be easy for employers to apply and allows them to prospectively satisfy affordability without the need to analyze every employee’s wages and hours.