How Do Affordability Rules Differ For Salaried Vs. Hourly Employees?

Understanding the affordability rules for salaried vs. hourly employees is essential for any business navigating the complexities of the Affordable Care Act (ACA). For many employers, especially those with a mix of salaried and hourly staff, ensuring compliance while offering meaningful health benefits can feel like a tightrope walk. The way an employee is paid fundamentally changes how affordability is calculated, creating distinct challenges and opportunities for each group. This is where modern solutions like an Individual Coverage Health Reimbursement Arrangement (ICHRA) come into play, offering a flexible and compliant path forward for companies of all sizes.

At Venteur, we believe that health and financial benefits should adapt to the evolving ways people work. By making these benefits more accessible and easier to understand, we empower both employers and their teams. This guide will walk you through the key differences in affordability rules, helping you build a benefits strategy that is fair, compliant, and tailored to your workforce.

Key Differences in Pay Structures: Salaried vs. Hourly

The foundation of ACA affordability calculations lies in an employee's income, which is determined differently for salaried and hourly workers. Understanding these pay structures is the first step toward mastering compliance.

Definition of Salaried Employees

Salaried employees are paid a fixed amount of money each year, known as an annual salary. This amount is predetermined and does not change based on the number of hours worked in a particular week. Paychecks are typically consistent, providing financial stability and predictability for the employee. Salaried positions are often classified as "exempt," meaning they are not eligible for overtime pay under the Fair Labor Standards Act (FLSA), though this depends on their job duties and salary level.

Definition of Hourly Employees

Hourly employees are compensated based on an hourly wage for the exact number of hours they work. Their paychecks can fluctuate from one pay period to the next, depending on their schedule, shifts, and any overtime worked. Converting an hourly wage to salary for comparison purposes can be done, but the inherent variability in an hourly worker's income is a critical factor in benefits administration.

How Pay Calculation Works for Each Type

The method of calculating salary by hourly rate and vice versa highlights their core differences. For a salaried employee, their annual salary is simply divided by the number of pay periods in a year (e.g., 26 for bi-weekly pay). For an hourly employee, their gross pay is their hourly rate multiplied by the number of hours worked in a pay period. This often includes overtime, which is typically calculated at 1.5 times their regular rate for any hours worked beyond 40 in a week. This variability makes income-based calculations, like those for health insurance affordability, more complex for hourly staff.

Affordability Rules Impacting Salaried Employees

For salaried employees with stable incomes, proving that health insurance is affordable is generally straightforward. Employers have a clear picture of their annual earnings, which simplifies compliance with ACA regulations.

Health Insurance Benefits for Salaried Workers

Salaried employees have traditionally been the primary recipients of employer health insurance plans. These often include comprehensive group health plans with a fixed monthly premium contribution from the employee. For these plans to be compliant, the employee's contribution for the lowest-cost, self-only plan that provides minimum value cannot exceed a certain percentage of their income.

Legal Requirements Under the ACA for Salaried Workers

Under the ACA, Applicable Large Employers (ALEs), generally those with 50 or more full-time equivalent employees, must offer affordable, minimum-value health coverage to their full-time staff or face potential penalties. The Affordable Care Act requirements for employers state that coverage is considered "affordable" if the employee's required contribution is no more than a specific percentage of their household income, which is 9.02% for 2025 and will be 9.96% for 2026.

Since employers do not know an employee's total household income, they can use one of three ACA affordability safe harbors. For salaried employees, the Rate of Pay safe harbor is a common and practical choice. This method calculates affordability based on the employee's monthly salary. Alternatively, employers can use the W-2 Wages safe harbor, which is based on the gross income reported in Box 1 of their Form W-2.

For example, if a salaried employee earns $60,000 annually, their monthly salary is $5,000. To be considered affordable in 2025 using the Rate of Pay safe harbor, their monthly premium contribution cannot exceed $451 ($5,000 x 9.02%). Both safe harbors provide clear and reliable methods for employers to ensure compliance for their salaried workforce.

Affordability Rules Impacting Hourly Employees

Determining affordability for hourly employees presents a greater challenge due to their variable hours and fluctuating pay. This is where the flexibility of ICHRA truly shines, providing employers with the tools they need to offer compliant health benefits.

Health Coverage Options for Hourly Workers

Hourly workers have historically had fewer options for health coverage for employees, particularly in industries with high turnover or variable staffing needs. However, ICHRA changes this dynamic completely. With ICHRA, employers can offer a tax-free monthly allowance that hourly employees can use to purchase their own individual health insurance plan. This approach empowers employees with choice while simplifying administration for the employer. Employers can even create different allowance amounts for different employee classes, such as hourly versus salaried workers.

Compliance and Legal Standards for Hourly Workers

Ensuring hourly vs salaried ICHRA compliance requires using the right affordability calculation method. Since the W-2 Wages safe harbor can be unreliable for employees with variable hours, employers often turn to two other ACA affordability safe harbors: the Rate of Pay Safe Harbor and the Federal Poverty Line (FPL) Safe Harbor.

• Rate of Pay Safe Harbor: This method is ideal for hourly employees. To use it, you treat the employee as earning 130 hours per month multiplied by their hourly rate, regardless of how many hours they actually work. For example, an employee earning $20 per hour is assumed to have a monthly income of $2,600 ($20 x 130 hours). For 2025, their maximum affordable contribution would be $234.52 ($2,600 x 9.02%). This method provides a predictable way to calculate affordability even when hours fluctuate.
• Federal Poverty Line (FPL) Safe Harbor: This is the simplest safe harbor. It deems coverage affordable if the employee's contribution for self-only coverage does not exceed 9.02% (for 2025) of the federal poverty line for a single individual, divided by 12. Because it uses a single, fixed income amount for all employees, it's easy to administer and guarantees affordability for even the lowest-paid workers.

Using these ICHRA affordability calculation methods allows employers to confidently offer benefits to their entire workforce, knowing their plan is compliant.

Comparing Employee Benefits: Salaried vs. Hourly

Beyond health insurance, the overall benefits package often differs between salaried and hourly employees. Understanding these differences can help employers create a more equitable and attractive employer benefits program.

Common Benefits Offered to Salaried Employees

Salaried employees often receive a comprehensive employee benefits program that includes:

• Paid time off (vacation, sick days, and holidays)
• Retirement savings plans, such as a 401(k) with an employer match
• Life and disability insurance
• Professional development opportunities

Common Benefits Offered to Hourly Employees

Benefits for hourly employees can vary widely. While many receive access to employee health plans, especially if they work for an ALE, other perks like paid time off or retirement plans may be less common or have stricter eligibility requirements. ICHRA helps bridge this gap by providing a high-value health benefit that is portable and personalized, giving hourly workers access to the same quality coverage as their salaried counterparts. This aligns with Venteur's mission to empower all workers with benefits that support their health and financial well-being.

Financial Implications of Being Salaried vs. Hourly

The choice between a salaried and hourly position carries significant financial implications that extend beyond the base pay rate. How you calculate pay and structure compensation affects everything from budgeting to long-term financial planning.

How Salary Affects Overall Compensation

A stable salary makes it easier to calculate annual income and plan for the future. Salaried employees often have clearer paths for raises and promotions and may be eligible for annual bonuses that contribute to their overall compensation. This predictability is a major advantage for financial stability.

Overtime Pay Considerations for Hourly Employees

For hourly employees, overtime pay can be a significant financial benefit. The ability to earn time-and-a-half for extra hours worked can substantially boost income, though this income is not always guaranteed. When employers calculate employee payroll, they must carefully track hours to ensure compliance with overtime laws. While this provides an opportunity for higher earnings, the lack of income consistency can make budgeting more challenging.