How the IRS will let you adopt ways of calculating employee contributions to health care coverage – known in ACA lingo as “safe harbors”
How you can work with these safe harbors right in your ERP system, if you’re processing payroll with Microsoft Dynamics GP (Great Plains)
The first thing Microsoft Dynamics GP Payroll users need to do is set up benefit codes to track their employer-sponsored health care coverage for employees. For every plan offered, a unique benefit code should be set up to track which employees are signed up for that plan.
(This step is the second of five setups that we recommended in a recent post for ACA reporting readiness in Microsoft Dynamics GP.) An employer can use a different safe harbor for each plan but must apply the same safe harbor to all enrollees in a plan.
At the center of this discussion is the biggest challenge facing many companies trying to satisfy the directives of federal legislation as complicated and revolutionary as the ACA: What’s “affordable” in the employer realities of the Affordable Care Act?
In some areas, an improving labor market is shrinking the pool of potential employees, forcing companies that had developed strategies to limit employees to less than 30 hours per week to rethink.
For one of our clients, 2012 was about developing their ACA strategy and 2013 was about prototype implementation with minimal hiccups. In 2014, business improves and the supply of talented candidates shrinks at the very time this client needs to add hours in order to satisfy growing customer demand.
So for this employer, it’s now about reconciling “affordable” with the realization that more employees will be eligible for health care coverage than previously forecast.
Starting early next year, many of our users will begin extending health care coverage to a larger pool of employees. Staffing firms, in particular, are faced with a transient workforce where hours vary from one period to the next.
Making sense of ‘affordable’
The ACA defines “affordable” as coverage where the employee’s contribution for self-only coverage does not exceed 9.5% of their household income in 2014 and 9.56% of household income in 2015. Since employers typically don’t have all the information needed to identify total household income, the IRS advises employers to use the gross wages of the employee to test for the 9.5% / 9.56% threshold.
(There are circumstances in which an employee’s household income is less than the employee’s W-2 wages — for example, as a result of adjustments to gross income for alimony paid or losses due to self-employment.)
Often overlooked in the “affordable” calculation is the ACA’s language requiring the IRS to adjust this percentage to reflect any excess in the rate of health insurance premium growth over the rate of income growth. Both measurements use 2013 as the base year. As you can see from the adjustment noted above, in 2015 the threshold will rise to 9.56%. Depending on the rate of growth of health care as a whole, over real wage growth, you can expect to see further adjustments on a year-to-year basis.
Meeting the criteria of “affordable” serves only one purpose – sheltering a company with 50 or more full-time employees or full-time equivalents from a potential Employer Shared Responsibility payment that would be triggered if at least one of its full-time employees receives a premium tax credit for purchasing individual coverage on one of the new exchanges in the health insurance marketplace.
The penalty-assessment period begins Jan. 1, 2015. Companies that employ lower-wage workers are the most vulnerable.
Understanding the 'affordability' safe harbors overall
With all these moving parts – the uncertainty of what constitutes total household wages at the individual employee level, and the uncertainty of how many hours a variable-hour employee will actually work during his or her stability period – how is a company to guard against assessment of an Employer Shared Responsibility payment?
The IRS got this point.
That’s why the “affordability safe harbors” – three of these options – were written into the ACA. To calculate employee contribution to health care coverage, the IRS allows an employer to adopt one of the following per plan offered.
W-2 safe harbor
Rate-of-Pay safe harbor
Federal Poverty Line (FPL) safe harbor
If an employer has multiple plans, they may use different safe harbors for each plan, but only one per plan.
Setting up safe harbors in GP
The Payroll module of Dynamics GP – as is – can calculate two of these safe harbors:
W-2 Safe Harbor
Federal Poverty Line (FPL) Safe Harbor
To calculate the third safe harbor, Rate-of-Pay, you will need a system enhancement.
Let’s first identify what every safe harbor does and then cover how to set up each in GP.
W-2 safe harbor
The W-2 affordability safe harbor determines affordability based on whether an employee’s premium contribution for the lowest-cost, self-only coverage that provides minimum value exceeds 9.5% (in 2014) and 9.56% (in 2015) of the wages reported on that employee’s Form W-2 Box 1 for the calendar year.
This safe harbor isolates the employee’s contribution amount to their wages alone without referencing total household income. It does not, incidentally, cap the employee contribution to the actual employer expense for providing that coverage.
The major drawback to using this safe harbor is that it isn’t pegged to any minimum hours of work – meaning that if an employee, during their stability period, works fewer hours, the company would have to absorb a greater cost. Another drawback is that Box 1 doesn’t include pre-tax figures such as employees’ 401(k) contributions; these can be added back in to the gross wages to determine the 9.5% / 9.56% maximum deduction.
An employer who uses the W-2 safe harbor may wish to set each employee’s cost for self-only coverage at 9.5% / 9.56% of the employee’s W-2 wages for the month, but also set a maximum monthly amount. This will ensure the employee contribution meets “affordability” for lower-paid employees and that higher-paid employees are not charged excessive monthly amounts. Applying a ceiling, or maximum contribution for a month, is acceptable as long as it’s universally applied. The employer also must use a consistent dollar amount or percentage throughout the calendar or plan year.
In Microsoft Dynamics GP payroll users, using the W-2 safe harbor is straightforward in deduction setup. Since it is based on a percentage of gross earnings, you just need to put in the percent to deduct.
One important note to consider:
Under the ACA, there is no maximum amount an employer can deduct from an employee as long as they stay below the “affordable” threshold – in 2014, that is 9.5% of gross wages. In setting up your deductions, you may consider setting a maximum to shield higher paid workers from paying a high amount for coverage.
A downside of this maximum is that if an employee’s wages fluctuate from pay period to pay period, you may have a situation where the employee hits a maximum one pay period but does not earn enough during another pay period to cover their portion of the cost. Setting this deduction up at a Percentage of Earnings Wages may be the best approach, as it allows you to designate which pay codes to use and also will not be affected by TSA deductions.
Rate-of-Pay safe harbor
This safe harbor has gone through multiple revisions and the final regulations (unlike the proposed regulations) permit an employer to use the Rate-of-Pay safe harbor even if an hourly employee’s hourly rate of pay is reduced during the year.
Under the final regulations for the Rate of Pay safe harbor, coverage to an hourly employee is treated as affordable for a calendar month if the employee’s required contribution for the calendar month for the lowest cost self-only coverage does not exceed 9.5% (in 2014, adjusted to 9.56% in 2015) of an amount equal to 130 hours multiplied by the lower of the employee’s hourly rate of pay as of the first day of the coverage period (generally the first day of the plan year) or the employee’s lowest hourly rate of pay during the calendar month.
This change was good news for many of our clients who have employees whose hourly rates often change.
If an hourly employee treated as a full-time employee earns $10 per hour in a calendar month (and earned at least $10 per hour as of the first day of the coverage period) but has one or more calendar months in which the employee has a significant amount of unpaid leave or otherwise reduced hours, the employer may still require an employee contribution of up to 9.5% of $10 multiplied by 130 hours ($123.50) in 2014 [in 2015: 9.56% of $10 x 130 hours, or $124.28].
Salaried employees’ wages can be broken down to their hourly rate equivalent for this testing.
The Rate of Pay safe harbor cannot be used, as a practical matter, for tipped employees or for employees who are compensated solely on the basis of commissions. The other two safe harbors can be used in these situations.
For companies with employees whose hours fluctuate, this approach may be the best. It overcomes the real possibility in the W-2 safe harbor where the employee’s hours will be reduced to a point that the cost of coverage falls mostly on the employer while the federal poverty line safe harbor is tied to the Federal Poverty Level – hovering around $7.25 per hour (it is slightly different, but very minimal).
The gap between the federal minimum wage and what is paid to the employee may make this a better option, especially as local legislation on living wages may expose employers to higher cost.
Of the three safe harbors, the Rate of Pay safe harbor is the most complex to set up in Microsoft Dynamics GP. Because the rate of pay can fluctuate from month to month depending on movement in employee hourly rates, this deduction might need to be calculated each month. Our software, Sypnio ACA Reporting, provides the ability to adjust this rate automatically by changing the actual deduction amount on the employee deduction record or by creating a variable deduction transaction within a payroll batch.
Federal Poverty Line (FPL) safe harbor
For coverage to be affordable, the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value cannot exceed 9.5% of the Federal Poverty Line (FPL) for the applicable calendar year, divided by 12. Employers can use the most recently published FPL as of the first day of the plan year and must use the FPL applicable to the state in which the employee is employed.
This method establishes one universal cost for all employees within that plan’s category. It’s the simplest harbor to use. Assume that the Federal Poverty Line for 2015 for an individual is $11,170. The employer sets the annual employee contribution for employee single-only coverage for each month in 2015 as an amount equal to 9.5% multiplied by $11,170, which is $1,061.15, and then divides by 12 for a monthly premium of $88.43.
The drawback to this approach is that it’s based on the federal government establishing the poverty line, a designation based on the federally mandated minimum wage of $7.25 per hour. As political posturing makes for a lack of movement on the minimum wage debate in the Congress, individual states and municipalities are taking it upon themselves to raise the minimum wage at the local level.
For Microsoft Dynamics GP payroll users, the FPL safe harbor is the simplest to set up. This is a standard deduction amount each pay period and the only thing to remember is to check the Allow Arrears deduction option to “catch-up” if an employee does not satisfy their contribution in a previous pay period.
Which ACA safe harbor is optimal?
Of the three safe harbors, the Rate-of-Pay option offers employers the best shield from the uncertainties surrounding household income and number of hours worked during the stability period while providing the safest avenue to having employees contribute their share of coverage under the ACA.
The assumption is that if an employee is offered employer-provided health coverage, they are reasonably expected to work at least 30 hours during this period as they had during the measurement period that granted them eligibility to health care coverage.
This option also shields employers from local minimum wage changes as they gain momentum.
Setting up Rate-of-Pay safe harbor in GP
One feature of Microsoft Dynamics GP Payroll allows variable deductions that are entered as payroll transactions in which the amounts can change from pay period to pay period.
In September, we will be releasing an add-on to our GP-integrated ACA compliance and business intelligence software that will enhance this feature by offering the option of adjusting the deduction amount in the employee deduction master file or generating the deduction transaction in a payroll batch.
Our core application is called Sypnio ACA Reporting. This add-on to our core application will be called Sypnio ACA Variable Deduction Management System.
“Sypnio” comes from the Greek for “smart” and “responsive.”
Visit sypnio.com for details on our suite of ACA reporting software that works within Microsoft Dynamics GP, including our enhancement for companies with multiple GP Payroll databases, Sypnio ACA Database Combiner.
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