“A safe harbor is a provision of a statute or a regulation that specifies that certain conduct will be deemed not to violate a given rule. It is usually found in connection with a vaguer, overall standard.” — Wikipedia

Update 3/30/16:  A new post explains the options available for eliminating conflicting affordability safe harbor codes.  This is available in version 7.57.322 and higher, available now using the Tools->Check for Updates option.

Last week, while reviewing one of our customer’s 1095-C forms, an insurance company pointed out that the 1A code used on line 14 conflicted with the 2H code that they had used on line 16.  The 1A code says that you used the federal poverty line method for the affordability safe harbor while the 2H code indicated that they rate of pay method was used.

First a quick refresher:  what is the affordability safe harbor?  The ACA says that employers must offer self only coverage to employees that is “affordable”.  In the law, affordable is defined as no more than 9.5% of household income.  The problem is that employers have no idea what an employee’s “household income” is.  First of all, household income is determined after the end of the year when the employee is filling out their tax return, so it is not even known at the time that decisions about coverage costs and offers are being made.  Second, the employee never reports their household income to their employer!

So the IRS substitutes three different options to stand in for “household income”:  W-2 income, federal poverty line, and rate of pay.  Each of these substitute method has a corresponding code for reporting on the 1095-C:  2F (W-2 income), 2G (poverty line), and 2H (rate of pay).

When you were determining the costs that employees would pay for their share of the insurance plan, you took one of those methods and made sure that the employee’s costs would not be more than 9.5% of that amount.  (You remember doing that, right?)

In fact, employers who covered the entire cost of the coverage for employees didn’t even think about affordability.  Other employers who set a nominal amount for coverage also didn’t think about how they measured affordability because the employee’s share was so small it was obviously affordable!  (Unfortunately there is no 2O code for “obviously affordable”).

At the end of the year for the 1095-C, you need to tell the IRS what affordability safe harbor was used for each employee.  Only one affordability safe harbor method should be reported for each employee.  However you might use different safe harbors for different classes of employees, especially if they are offered different plans that have different costs.  That means you may need to edit the safe harbor codes manually on some employees.

For 1095-C reporting, if you used the federal poverty line safe harbor and your plan meets the other requirements of the 1A code, that is the code you use on line 14.  The 2G code would be the code selected for line 16 because that also says that you used the federal poverty line safe harbor.

If you did not use the federal poverty line safe harbor, then 1A would not be used for line 14.  You would use one of the other offer codes (1B/1C/1D/1E) in combination with either the 2F (W-2 income) or 2H (rate of pay) codes.

When compiling the 1095-C information, employees that decline coverage have the affordability safe harbor code reported on line 16.  Technically speaking, using the 1A offer code and the 2G safe harbor code is redundant.  Line 16 could technically be left blank because the 1A code implies the 2G code.  In fact, the latest version of the program does leave the line 16 code blank if the line 14 code is 1A.

Originally, the Compile 1095-C option would used the 2G code on line 16 for employees that declined instead of leaving it blank.  This was done because it made it easier to focus on employees that were missing a code for a month on line 16 to see whether this was an error in the compile logic, due to missing, incorrect or bad data, or whether it was correct based on the employee’s circumstances.  However, the Line 16 Report was changed so it could be run for employees that have a 1H code (no offer) and no line 16 code, so this is really not necessary any more.

We are readying an update to the HR program that will display a message during the 1095-C printing process if you have used the 1A and 2F/2H codes together.  If you are waiting until the last minute to print your 1095-C’s, this will catch the situation and give you a chance to correct it.  We will post an update to the blog when this update is available for download.

What if you have already issued your 1095-C forms to your employees with these codes?  We have submitted a question to the IRS to see whether there is a need to re-issue the forms with corrected codes, and will post an update when/if we receive a response.

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