© 2026 CoAd. All rights reserved.
Explains the three IRS safe harbors an Applicable Large Employer can use to show coverage is affordable without measuring household income. Covers who the rules apply to and what makes coverage affordable.
Applicable Large Employers can use one of three IRS safe harbors — Form W-2 wages, rate of pay, or the federal poverty line — to show their health coverage is affordable without having to measure an employee's household income.
Applicable Large Employers (ALEs) are required to offer affordable health coverage that meets minimum value standards to their eligible employees. Eligible employees include full-time and variable-hour employees who have met the required hours during the measurement period.
Coverage is considered affordable if it does not require the employee to pay more than 9.12% (in 2023, 8.39% in 2024) of their annual household income. The percentage used to calculate affordability is adjusted annually.
Since it is often difficult or impossible for an employer to measure an employee's annual household income, the IRS has created three safe harbors that employers may use to assess the affordability of their plan. Those safe harbors determine affordability based on the employee's Form W-2, rate of pay, or the federal poverty line.
Important: The examples below use the 9.12% (2023) affordability rate stated in the source material. Because the percentage is adjusted annually, confirm the current year's rate before running these calculations.
Employers can use this safe harbor by reviewing employee W-2 wages (Box 1) at the end of the calendar year to determine if their annual cost for the lowest self-only coverage providing minimum value meets the affordability requirement.
Formula: (W-2 wage / 12) x affordability rate for the year = maximum amount of the increase that is deemed affordable
Example: ($35,000 / 12) x 9.12% = $266
$266 is the maximum an employee can pay each month for single-only coverage and for the insurance to be considered affordable.
With this safe harbor, an employer uses an employee's pay rate to calculate their prospective monthly income based on 130 hours per month (this is the IRS definition of full time employment for a month). Coverage is considered affordable if the employee's monthly contribution does not exceed 9.12% (in 2023) of their projected income.
Formula: (130 x rate of pay) x affordability rate for the year = maximum amount of the increase that is deemed affordable
Example: (130 x $14.00) x 9.12% = $165.98
$165.98 is the maximum an employee can pay a month for single-only coverage and for the insurance to be considered affordable.
This safe harbor is met if the required monthly employee contribution for self-only coverage does not exceed 9.12% (in 2023) of the Federal poverty line divided by 12.
Since the calculated amount is the same for all employees, this safe harbor is the simplest method. However, it will result in the largest employer contribution since it is the most conservative estimate of employee income.
Because it is often difficult or impossible for an employer to measure an employee's annual household income, the IRS created three safe harbors employers may use to assess whether their plan is affordable. Those safe harbors determine affordability based on the employee's Form W-2, rate of pay, or the federal poverty line.
Coverage is considered affordable if it does not require the employee to pay more than 9.12% of their annual household income in 2023, or 8.39% in 2024. The percentage used to calculate affordability is adjusted annually.
Multiply 130 hours per month by the employee's rate of pay, then multiply the result by the affordability rate for the year; 130 hours is the IRS definition of full-time employment for a month. For example, (130 x $14.00) x 9.12% = $165.98, the maximum the employee can pay monthly for single-only coverage.
The Federal Poverty Line safe harbor is the simplest method because the calculated amount is the same for all employees. However, it results in the largest employer contribution since it is the most conservative estimate of employee income.
Applicable Large Employers must offer affordable coverage meeting minimum value standards to their eligible employees. Eligible employees include full-time and variable-hour employees who have met the required hours during the measurement period.