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ACA Employer Mandate for Health Insurance – Requirements & Penalties

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The Affordable Care Act (ACA) — popularly known as Obamacare — obligates U.S.-based businesses and business units with 50 or more full-time equivalent employees to provide ACA-compliant health insurance coverage to their employees. In most cases, an enterprise that fails to provide such coverage is subject to a tax penalty: the employer shared responsibility payment.

This obligation, known as the “employer mandate,” is a key underpinning of the Affordable Care Act. It’s part of a much broader array of ACA provisions that affect virtually all U.S.-based businesses, including those with fewer than 50 full-time employees.

This guide explores the most important of those provisions. It covers:

  • How to determine company size for the purposes of the ACA
  • What the employer mandate means for employers with 50 or more full-time employees
  • What constitutes ACA-compliant health insurance coverage for employers
  • What happens when larger employers don’t provide ACA-compliant health insurance coverage
  • How larger employers can avoid employer shared responsibility payments
  • What the ACA asks of employers with fewer than 50 full-time employees
  • What self-employed individuals need to know about health insurance coverage

ACA Requirements and Options for Businesses With 50 or More Full-Time Employees

The Affordable Care Act asks far more from employers with more than 50 full-time employees — which the law refers to as “applicable large enterprises” (ALEs) — than it does of smaller businesses. The ACA’s employer mandate and related reporting requirements apply only to ALEs.

The ACA’s employer mandate requires ALEs to offer ACA-compliant group health insurance plans to the vast majority of eligible full-time employees. Alternatively, ALEs can fulfill the employer mandate by offering individual Health Reimbursement Arrangements (HRAs) to eligible full-time employees. ALEs that fail to do either are generally subject to employer shared responsibility payments that, although variable, typically add up to several thousand dollars per employee per year.

Requirements for Applicable Large Enterprises and How to Determine Whether Your Business Is Bound By Them

According to the IRS, two core sections of the Affordable Care Act apply only to businesses that qualify as ALEs: the employer shared responsibility provisions (the employer mandate) and the provisions requiring employers to report information about offers of minimum essential health insurance coverage (ACA-compliant health insurance).

Determining Whether Your Business Qualifies As an ALE

The ACA requires employers to determine their ALE status each year using employment information from the prior calendar year. For the purposes of this calculation and all applicable ACA provisions concerning full-time employees, a full-time employee is defined as any employee who works at least 30 hours per week on average for more than 120 days in a year,  per Healthcare.gov.

The calculation itself is straightforward:

Total number of full-time employees for each month of the prior calendar year

+

Total number of full-time equivalent employees for each month of the prior calendar year

/ 12

=

Average number of full-time and full-time equivalent employees for the prior calendar year

If the average number of full-time and full-time equivalent employees for the prior calendar year equals 50 or more, the employer qualifies as an ALE for the current calendar year. The only significant exemption concerns employees who qualify for medical care through the U.S. military or Department of Veterans Affairs. Such employees don’t count toward the 50-employee threshold in months when their military or veterans’ coverage is active.

Qualifying Health Care Insurance Plans Under the Employer Mandate

ALEs bound by the employer mandate must offer ACA-compliant health coverage to at least 95% of their full-time employees and those employees’ dependents. These plans must meet three criteria:

  • Minimum Essential Coverage. All employer-sponsored plans initiated after the Affordable Care Act took effect qualify as “minimum essential coverage.” Grandfathered plans — those in place since before the ACA took effect — also qualify as minimum essential coverage, although these are increasingly uncommon. Nonemployer-sponsored plans that qualify as minimum essential coverage include government-run coverage — such as Medicare, Medicaid, and CHIP — and individual plans available on the federal Health Insurance Marketplace.
  • Minimum Value. Generally, plans offering “minimum value” must cover at least 60% of the total allowed benefits costs expected to be incurred under the plan. Refer to IRS guidance for more details on minimum value, including possible exceptions.
  • Affordable Coverage. An employer-sponsored health plan is considered “affordable” if the total cost to the employee is no more than 9.83% of household income. “Total cost” here refers to the total expected out-of-pocket cost of the plan, including premiums, copays, and coinsurance. When a covered employee’s total household income isn’t known, the employer can use one of three “safe harbors” to determine plan affordability: the employee’s total W-2 income, the employee’s rate of pay, or the federal poverty line. Refer to Healthcare.gov for more details about plan affordability.

Reporting Requirements for ALEs

Each tax year, the Affordable Care Act obligates ALEs to report coverage information to two parties: the IRS and all full-time employees. Employees must receive this information by January 31 of the following year. The IRS reporting (filing) deadline is February 28 for paper reports or April 1 for electronic reports of the following year.

ALEs report coverage information using two forms: Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) and Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns). Collectively, these forms convey:

  • Formal identification of the ALE
  • Identification of each employee receiving an offer of coverage
  • The duration of the offer of coverage

According to the IRS, the penalty for failure to report coverage information is $270 per instance, not to exceed $3,275,500 in a calendar year.


Health Reimbursement Arrangements (HRAs) for Larger Employers

The ACA’s employer mandate allows large businesses that can’t afford to sponsor group health insurance plans to full-time employees — or that otherwise choose not to offer such plans — to offer an alternative: individual Health Reimbursement Arrangements (HRAs).

HRAs are account-based health plans superficially similar to health savings accounts (HSAs). According to the U.S. Department of Health and Human Services (HHS), HRAs enable employers to make defined, untaxed reimbursements for eligible medical expenses such as health insurance premiums, deductibles, copays, and coinsurance for employees enrolled in ACA-compliant individual health insurance plans. Responsibility for HRA contributions falls to the employer; there’s no employee contribution.

The ACA makes HRAs available to employers of any size other than self-employed individuals. There’s no minimum or maximum employer contribution, although HRAs must meet affordability standards similar to those governing employer-sponsored coverage. Specifically, per Healthcare.gov, an individual-coverage HRA qualifies as affordable if the employee’s monthly payment, net of any employer reimbursement, for the lowest-cost “self-only” Silver plan available through the marketplace in their area is less than 9.83% of of the employee’s average monthly household income. In this context, the Silver plan is the second lowest (of four) “metal” plan tiers in the marketplace. “Self-only” means that the plan insures only the employee and does not cover a spouse or dependents.

Employers have some flexibility to determine HRA eligibility within their own organizations using employee “classes” determined by HHS. For example, an employer can legally offer HRA participation to full-time employees — a defined employee class — but not seasonal part-time employees. However, employers can’t pick and choose which class members receive coverage or customize coverage within a class. Contribution and reimbursement rates must be the same for all class members.


Employer Shared Responsibility Payments for ALEs in Violation of the Employer Mandate

The ACA penalizes ALEs that fail to satisfy the employer mandate by providing health care coverage through qualifying group health insurance or individual HRA plans. This penalty is the employer shared responsibility payment.

The size of the employer shared responsibility payment depends on two factors:

  • Adequate Coverage. The employer must offer qualifying health care coverage to at least 95% of its full-time workforce and their dependents during the entire calendar year. If the employer offers qualifying coverage to 95% of full-time employees during some months of the year but not others, the employer shared responsibility payment is prorated on a monthly basis.
  • Premium Tax Credit Eligibility. If one or more full-time employees receives a premium tax credit to subsidize health insurance purchased on the federal Health Insurance Marketplace (or state equivalent, if applicable), the employer shared responsibility payment applies — even if the employer offers qualifying coverage to at least 95% of full-time employees. If the employees received premium tax credits for part of the year only, the penalty is prorated. Refer to IRS guidance for more information about premium tax credits.

The precise employer shared responsibility payment calculation varies depending on the circumstances, per the IRS. These calculations apply to the 2018 tax year and are indexed to inflation, meaning they’ll increase each year in the future. The circumstances that involve the shared responsibility payment include:

  • The ALE does not provide coverage at all or does not offer coverage to at least 95% of full-time employees and dependents and at least one employee qualifies for the premium tax credit for the entire year: The employer shared responsibility payment is the number of full-time employees employed during the calendar year (minus up to 30) multiplied by $2,320.
  • The ALE provides coverage to at least 95% of full-time employees and dependents in some months but not others and at least one employee qualifies for the premium tax credit: The employer shared responsibility payment for each month when the employer mandate was not met is the number of full-time employees employed that month (minus up to 30) multiplied by 1/12 of $2,320 (about $193.33). The total employer shared responsibility payment for the calendar year is the sum of these monthly calculations.
  • The ALE provides coverage to at least 95% of full-time employees and dependents for the entire calendar year but at least one employee qualifies for the premium tax credit in some or all months: The employer shared responsibility payment for each applicable month is the number of full-time employees who receive a premium tax credit that month multiplied by 1/12 of $3,480 ($290). The total employer shared responsibility payment for the calendar year is the sum of these monthly calculations, not to exceed the payment the ALE would incur if it did not offer coverage to at least 95% of full-time employees.

Refer to IRS guidance for more detail on determining employee eligibility and calculating employer shared responsibility payments.


ACA Requirements and Options for Businesses With Fewer Than 50 Full-Time Employees

The Affordable Care Act does not obligate businesses and business units with fewer than 50 full-time equivalent employees — non-ALEs — to offer group health care insurance coverage to their employees. Non-ALEs therefore aren’t liable for employer shared responsibility payments under any circumstances.

The ACA does require smaller enterprises to meet certain obligations under the law, however. Some of these obligations apply to all businesses with employees, even those that don’t provide health insurance coverage. The ACA also provides for a marketplace where businesses with 50 or fewer full-time employees can purchase ACA-compliant group health insurance plans and a small-employer analogue to individual Health Reimbursement Arrangements.

Small Employers’ Obligations Under the Affordable Care Act

The ACA defines “small employer” as any non-ALE with more than one and fewer than 50 non-family employees. This definition excludes self-employed individuals and businesses whose only employees are self-employed individuals, self-employed individuals’ spouses, or other owners of the business.

Under the Affordable Care Act, small business owners must do the following, per the IRS:

  • Withhold an Additional Medicare Tax From Highly Compensated Employees. This amounts to 0.9% of employee wages or compensation in excess $200,000.
  • Report the Value of Employer-Provided Health Insurance Coverage on Form W-2. Small employers that choose to offer employer-sponsored health insurance coverage may need to report the value of that coverage on Form W-2, which details employee wages and withholdings.
  • Provide a Summary of Benefits and Coverage to Employees. Any small employer that chooses to offer health insurance must provide employees with a standardized Summary of Benefits and Coverage (SBC) detailing what the plan covers and what it costs. The U.S. Department of Labor has more details about creating and furnishing an SBC.
  • Report Coverage Information for Self-Insured Plans. Normally, this is the responsibility of employer-sponsored health insurance plan providers (insurers), but it falls to small employers that choose to self-insure. Small employers that offer traditional health insurance plans can disregard this requirement. Refer to IRS guidance for more details.

Using the SHOP Marketplace to Purchase Group Health Insurance Coverage

Small employers that choose to offer group health insurance coverage to their employees can purchase plans from one of two sources:

  • Directly from private health insurance companies offering employer-sponsored plans in their area
  • The Small Business Health Options Program (SHOP), access to which is generally restricted to employers with 50 or fewer employees, although ALEs with up to 100 employees can purchase SHOP plans in some states

SHOP plans are available through the federal SHOP portal or, in states that have them, a state-run equivalent.

Generally, the only way for small employers to qualify for the generous Small Business Health Care Tax Credit, which subsidizes up to 50% of employer-paid premium costs for for-profit employers and up to 35% for nonprofits, is to purchase a SHOP plan. However, not all small employers qualify for this credit. Eligibility is limited to employers that meet all of these criteria:

  • Fewer than 25 full-time equivalent employees
  • Average employee salary of $50,000 or less
  • Pays at least 50% of full-time employees’ premium costs
  • Offers SHOP coverage to all full-time employees (dependent coverage is not required)

Through SHOP, eligible employers can offer a single plan for all employees or multiple plans from which each employee is free to select their choice. SHOP offers health and dental plans; employers can choose to offer either or both. And there’s no minimum or maximum limit to the amount participating employers can put toward employee premiums.

SHOP health insurance plans use the same “metal” categories as individual marketplace plans:

  • Bronze: The insurance company pays 60% of expected costs, on average
  • Silver: The insurance company pays 70% of expected costs, on average
  • Gold: The insurance company pays 80% of expected costs, on average
  • Platinum: The insurance company pays 90% of expected costs, on average

Before enrolling in a SHOP plan, check Healthcare.gov to determine whether to use the federal SHOP portal or your state’s equivalent.


QSEHRAs: An Alternative to SHOP Plans for Smaller Employers

Any small employer that chooses not to offer traditional health insurance coverage can opt to set up a Qualifying Small Employer Health Reimbursement Arrangement (QSEHRA) instead.

QSEHRAs are similar to HRAs available to ALEs, with employers contributing untaxed health care cost reimbursements for participating employees and eligible household members with individual health insurance coverage, such as a marketplace plan. The most important distinction is a cap on annual employer contributions; regular HRAs don’t have employer contribution caps.

In the 2020 tax year, the QSEHRA contribution cap came to $5,250 ($437.50 monthly) for individual employees and $10,600 ($883.33 monthly) for employees plus covered household members. The cap is indexed to inflation and likely to rise each tax year.


Coverage Options for Self-Employed Individuals

Self-employed individuals aren’t considered “employers” under the Affordable Care Act and aren’t bound by the same regulatory and reporting requirements as ALEs and non-ALEs with qualifying employees. Indeed, following the elimination of the ACA’s individual health insurance mandate, they aren’t even obligated to procure health insurance for themselves.

Of course, many self-employed folks do choose to procure health insurance coverage. If you’re self-employed, your coverage options may include some or all of the following, depending on your income, household composition, state of residence, and other factors:

  • Marketplace Plans. The Health Insurance Marketplace is open to all self-employed U.S. nationals and eligible visa holders living in the United States, provided they’re not incarcerated or eligible for Medicare. “Metal” plans cover between 60% and 90% of expected health care costs, on average, with premiums proportional to the insurer’s coverage share. High-deductible health plans have lower premiums but higher deductibles, meaning plan holders pay more out of pocket for covered services before the insurer begins to pay. Super-affordable catastrophic plans, which have very high deductibles and modest coverage, are available only to applicants under age 30.
  • Medicare. Older self-employed individuals — age 65 and above — and those with certain serious medical conditions are eligible for Medicare, a health insurance program run by the federal government.
  • Medicaid. Lower-income self-employed individuals may be eligible for Medicaid, a health insurance program jointly administered by federal and state governments. In most states, the household income threshold for Medicaid eligibility is set at 133% of the federal poverty level, per Healthcare.gov. Elsewhere, the eligibility threshold is generally lower; check the Kaiser Family Foundation’s interactive chart for information about Medicaid eligibility in your state.
  • Military and Veterans’ Health Coverage. Active-duty military service members, reservists, and eligible members of their families may qualify for health coverage through Tricare, the U.S. military’s health insurance program. Military veterans may qualify for coverage through the VA.

Final Word

Ambitious entrepreneurs have agonized over whether to hire that first employee since time immemorial. Taking on paid help, with all the responsibility it entails, is a big deal. That’s not going to change anytime soon, no matter what the law says.

These days, another company size milestone arguably bears even more symbolic and practical import for growing employers: the 50 full-time equivalent employee threshold. Under most circumstances, that’s the cutoff for the “applicable large employer” (ALE) designation under the Affordable Care Act — and all the regulatory and reporting requirements that follow.

If your business is steadily approaching that threshold, don’t let the specter of obligatory employee health insurance coverage — or hefty penalties for noncompliance — scare you into pulling back. But don’t stick your head in the sand and deny the responsibility that could be headed your way. Take the time to familiarize yourself with what the ACA asks of larger employers before crossing that 50-employee threshold and look forward to a smoother, less costly transition to ALE status.

Brian Martucci
Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.

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