(Affordability Percentage for 2027: 10.22%)
Why affordability safe harbors matter
Applicable Large Employers (ALEs) must offer coverage that is affordable (and provides minimum value) to avoid potential employer shared responsibility penalties. Because an employee’s true “affordability” is based on household income (which employers usually don’t know), the IRS allows employers to use affordability safe harbors to determine affordability for ACA reporting and penalty protection.
On Form 1095-C, employers typically indicate affordability safe harbor use on Line 16:
- 2F = W-2 safe harbor
- 2G = Federal Poverty Line (FPL) safe harbor
- 2H = Rate of Pay safe harbor
Note: These codes are generally used when the employee is offered minimum essential coverage (MEC) that provides minimum value (MV), and the employer is relying on an affordability safe harbor for that month. Other Line 16 codes may apply depending on the employee’s enrollment, employment, or other status for the month.
The affordability threshold (what you compare against)
For any safe harbor, the general test is:
Employee’s required monthly contribution for self-only, lowest-cost MV plan
≤ (Affordability % × Applicable Safe Harbor Amount)
- The affordability % is set by the IRS and can change each calendar year.
- Use the affordability percentage that applies to the plan year for which affordability is being determined (e.g., the percentage used for ACA affordability purposes for that plan year/calendar year). For non-calendar-year plans, the applicable percentage generally changes when the new plan year begins.
- The applicable contribution and safe harbor amount depend on the safe harbor used. The FPL and Rate of Pay safe harbors generally use monthly amounts. The W-2 safe harbor generally uses the employee’s W-2 Box 1 wages and required contribution for the applicable coverage period, determined after year-end.
Safe Harbor #1: W-2 Wages Safe Harbor (Line 16 code 2F)
What it is
This method bases affordability on the employee’s Form W-2, Box 1 wages from that employer (for that calendar year).
How to calculate
- Determine the employee’s annual required contribution for self-only coverage (sum of the monthly employee-only premiums required for the months of offer/coverage).
- Determine the employee’s W-2 Box 1 wages for the year.
- Coverage is affordable under this safe harbor if:
Annual employee contribution ≤ (Affordability % × W-2 Box 1 wages)
Practical notes
- Box 1 wages can be reduced by pre-tax deductions (which can make affordability harder to meet).
- Typically evaluated on an annual basis; for reporting, employers may still code 2F by month when using this safe harbor approach for the year.
Safe Harbor #2: Federal Poverty Line (FPL) Safe Harbor (Line 16 code 2G)
What it is
This method uses the Federal Poverty Line for a single individual (in the 48 contiguous states and D.C., unless Alaska/Hawaii rules apply). It’s the simplest to use administratively but is often the most conservative.
How to calculate
- Identify the applicable FPL amount for a household of 1 (per federal guidelines).
- Convert it to a monthly amount:
- FPL monthly amount = (Annual FPL ÷ 12)
- Coverage is affordable under this safe harbor if:
Monthly employee contribution ≤ (Affordability % × FPL monthly amount)
Practical notes
- Employers generally use the FPL in effect within the allowed IRS timing rules (usually the FPL in effect within six months before the first day of the plan year).
- Because it’s based on a low income threshold, meeting FPL affordability often requires a relatively low employee premium.
Safe Harbor #3: Rate of Pay Safe Harbor (Line 16 code 2H)
What it is
This method bases affordability on the employee’s rate of pay, rather than actual hours worked or total wages. It can be used for hourly and salaried employees (with different calculation mechanics).
How to calculate — Hourly employees
- Use the employee’s applicable hourly rate of pay under IRS rules as of the relevant coverage period, taking into account any rate reductions that affect the safe harbor (most often the first day of the month).
- Multiply by 130 hours (ACA monthly equivalency):
Monthly safe harbor income = Hourly rate × 130
- Coverage is affordable if:
Monthly employee contribution ≤ (Affordability % × Hourly rate × 130)
How to calculate — Salaried employees
- Use the employee’s monthly salary (as of the start of the coverage period).
- Coverage is affordable if:
Monthly employee contribution ≤ (Affordability % × Monthly salary)
Practical notes
- Rate reductions during the year can affect whether this safe harbor is available or satisfied, particularly if an hourly employee’s rate decreases or a salaried employee’s monthly salary is reduced.
- This method is popular because it’s predictable and can be applied month-by-month.
Quick “Which code do I use?” guide (Line 16)
- Use 2F when affordability is determined using W-2 Box 1 wages.
- Use 2G when affordability is determined using the Federal Poverty Line method.
- Use 2H when affordability is determined using the Rate of Pay method.
As a reminder, employers should apply safe harbors consistently according to IRS rules (generally by reasonable categories of employees) and retain documentation supporting the affordability calculations.
ESB-9839-0726