https://www.goodrx.com/insurance/aca/affordable-care-act-employer-penalty
What Business Owners Need to Know
Key takeaways:
The Affordable Care Act (ACA) includes an employer mandate that requires large employers to provide affordable health insurance to employees. The rules — called “pay or play” — are formally known as employer shared responsibility provisions.
Businesses that have 50 or more full-time employees can face a penalty for not offering health insurance. Under the mandate, an employer must provide coverage to 95% of its full-time (or full-time equivalent) employees and their dependents.
If health coverage is not provided, the employer will face a tax penalty from the IRS. This penalty is also known as an employer shared responsibility payment.
Which businesses must offer health coverage for their full-time employees?
Businesses subject to the employer mandate are called applicable large employers, or ALEs. Whether a business is an ALE in the current year depends on the size of the employer’s workforce the previous year.
To be considered an ALE, a business must have an average of 50 full-time employees (or full-time equivalent employees) during the previous calendar year. All kinds of employers can be ALEs, including tax-exempt organizations.
What are the ACA minimum requirements for large employers?
Under the ACA, the minimum requirements for applicable large employers involve minimum value and minimum affordability. Those requirements include:
Minimum essential coverage: Employers are required to provide health insurance coverage to at least 95% of full-time employees and their dependents.
Minimum value: An employer-sponsored health plan provides minimum value if it covers at least 60% of the total allowed cost of benefits that the plan expects to have. This includes substantially covering expected costs for in-patient hospitalization and physician services.
Minimum affordability: Employers must provide affordable coverage. Coverage is considered affordable if the employee’s contribution does not exceed a certain percentage of an employee’s household income. This figure is 9.12% for 2023.
It is important to note that these requirements are just the tip of the iceberg when it comes to ACA employer mandate rules. Employers should work with financial professionals to file proper forms and comply with all IRS regulations.
What steps can you take to ensure compliance with the ACA?
For business owners, complying with the ACA employer mandate can be a daunting task. Fortunately, there is guidance available.
According to the Society for Human Resource Management (SHRM), some important steps a business can follow to ensure compliance with employer shared responsibility provisions include:
Deciding whether to pay or play
Evaluating grandfathered status of group health plan
Reviewing plan benefits for affordability requirements
Reviewing plan benefits for essential coverage and minimum value requirements
Analyzing covered employees and dependents
Providing tax documents to employees and dependents
Complying with pay-or-play responsibilities
Satisfying IRS reporting requirements
It is important to work with financial, tax, and legal advisors to ensure your business meets the requirements of the employer mandate.
How are ACA penalties calculated for employers?
An ALE can face a penalty for failing to offer affordable minimum coverage or — when these benefits are offered — if at least one full-time employee receives a premium tax credit for buying coverage through an ACA health insurance marketplace.
The 2023 penalty is either $2,880 or $4,320 per full-time employee, minus the first 30 employees. For example: If an employer with 150 employees does not offer health insurance to its full-time employees and their dependents and at least one employee buys health insurance through the marketplace, the penalty would be $345,600 (150 – 30 = 120 x $2,880 = $345,600).
If your business scales up or down, what’s your responsibility for complying with the ACA’s employer mandate rules?
Your responsibility to follow the employer shared responsibility provisions depends on the number of full-time employees for the previous year. So, whether you hire more people or scale down your workforce this year, your compliance will be based on the prior year.
Who enforces ACA regulations?
The U.S. Department of Health and Human Services has an Office for Civil Rights (OCR) that enforces regulations related to the Affordable Care Act. The OCR protects the civil rights of individuals who access or seek to access covered health programs or activities.
What other ACA rules do business owners need to be aware of?
ALEs subject to the employer mandate should be aware of some additional rules, such as:
If an employee has dependents, they are eligible to remain on their parent’s insurance until they turn 26 years old.
Include full-time equivalent (FTE) employees when calculating how many full-time employees you have. A few part-time employees might add up to one FTE employee.
Do not count employees covered through TRICARE or the Veterans Administration for ACA purposes.
Whether to include seasonal workers will depend on how many hours they worked and how long they have worked for the company.
This list provides some general rules. As we have emphasized, it is best to consult financial, tax, and legal advisors to ensure you are compliant with the employer mandate so that you can avoid penalties.
The bottom line
Having more than 50 full-time employees or the equivalent means your business will be subject to the ACA employer mandate.
This means employers have to play or pay: Play by offering affordable health insurance with minimum essential coverage or pay penalties. In 2023, the penalty for not complying is either $2,880 or $4,320 per full-time employee excluding the first 30 full-time employees. Consult financial, tax, and legal professionals to make sure you are complying with the employer mandate.
