ACA Employer Mandate & Shared Responsibility Overview & Penalties

The Affordable Care Act, signed into law in 2010, completely overhauled how many Americans accessed health insurance and their employer’s role in providing that insurance. The Employer Mandate outlines certain employers’ obligations to provide adequate insurance to their full-time employees. Not only must they offer coverage, but that coverage must meet minimum requirements and be considered affordable. 

It’s crucial for qualifying employers to understand their legal requirements and the potential consequences for failing to meet those requirements. If you aren't compliant, you can face significant penalties. 

Understanding the Employer Mandate

The Employer Mandate only covers ALEs—Applicable Large Employers. An Applicable Large Employer is an employer with at least 50 full-time employees or full-time equivalent employees. This is determined on an annual basis, using the employment numbers from the previous year. 

For example, if a company had 25 full-time employees the previous year but grew to include 60 full-time employees in the current year, they would not be considered an ALE for the current year. However, they would be considered an ALE for the next calendar year. 

Criteria for Full-Time Employees

When some people think of full-time work, they think of a standard 40-hour work week. However, under the Employer Mandate, full-time employees are those who work 30 or more hours per week. To calculate an employer’s average workforce across the year, you add the total number of full-time employees for each of the months in the calendar year. You should also include full-time equivalent employees in this number. You then divide that sum by 12 to find the average workforce for the year.

What is a full-time equivalent employee? This refers to a combination of employees working the same amount as a full-time employee. This calculation involves adding all the hours worked by non-full-time employees in a month, up to 120 hours per employee. You then divide that number by 120 for the number of full-time equivalent employees. Note that this number is used just to determine if the company is an ALE; it does not mean that the company has to offer health insurance to part-time employees.

Health Insurance Requirements

The health insurance provided by the company must meet certain standards. First, it must be offered to at least 95% of all full-time employees and their dependents. A dependent is an employee’s child up to the end of the month in which that child turns 26. The health insurance must be affordable, which means that it does not exceed a certain percentage of the employee’s household income. In 2024, that percentage is 8.39%.

IRS safe harbors provide multiple ways to calculate whether or not coverage is affordable. Coverage is considered affordable if self-only coverage is less than the indexed percentage of the employee’s monthly wages, the employee’s W-2 wages, or the federal poverty level for a single individual.

The coverage provided must also provide minimum value which is at least one plan that pays at least 60% of covered services.

If the coverage is not accessible to 95% of full-time employees, is not affordable under the calculations provided, or does not provide minimum value, an employer may be subject to penalties.

ACA Penalties Explained

Different penalties may be applied, depending on the way in which an employer falls short of the Employer Mandate. Companies should be familiar with these and other business tax issues in order to avoid hefty penalties.

The A Penalty: Failing to Offer Coverage

As of 2024, if an employer does not provide coverage to at least 95% of its full-time employees, the employer will be charged a sizable $2,970 per full-time employee for the year. This amount increases each year to account for inflation. The penalty is charged per full-time employee, not per full-time equivalent employee. Additionally, the penalty does not apply to the first 30 full-time employees.

The B Penalty: Failing to Offer Affordable Coverage With Minimum Value

If a company fails to offer affordable coverage or coverage that provides minimum value, it will be charged an even larger penalty. If the coverage is expensive enough that it exceeds the 8.39% threshold given above, it is considered unaffordable. If it does not cover at least 60% of the individual’s medical expenses, it does not provide minimum value.

When an applicable large employer falls short in either of these ways, the company must pay $4,460 per full-time employee as of 2024. Again, this number increases each year to account for inflation. Note this is the annual penalty. The IRS divides this number by 12 and assesses the penalty for each month of non-compliance.

Reporting Requirements

Companies report their compliance (or non-compliance) with the Employer Mandate on Forms 1094-C and 1095-C. Businesses with 50 or more full-time employees must file these forms each year. Form 1095-C includes information on the health coverage offered, the lowest premium available, and which months of the year it was available. Form 1094-C summarizes the details of 1095-C and includes your business name, EIN, and contact information. If you don't file these forms, the IRS may assess a penalty and send you Notice CP215.

Deadlines and Submission Guidelines

The IRS provides information on the due dates for each calendar year, adjusting for weekends. For tax year 2023, Forms 1094-C and 1095-C must be filed by February 28 if they are filed on paper. Those filing electronically have until April 1, 2024. You can get an automatic 30-day extension when you file Form 8809.

You only need to submit one 1094-C with all of your 1095-C forms—there is one 1095-C form per employee. However, if you have a lot to send and you send them in batches, ensure that there is one 1094-C for each bundle of 1095-C forms.

How the IRS Uses This Information

The IRS uses the information included on these forms to determine whether or not ALEs are compliant with the Employer Mandate. If you receive notification of penalties, it’s likely due to the information on these forms. It’s crucial to check these forms multiple times for accuracy; many incorrectly assessed penalties are the result of false or incomplete information on 1094-C and 1095-C forms.

IRS Letter 226-J: Notification of Potential Penalties

You will receive IRS Letter 226-J if the IRS believes you are liable for an Employer Shared Responsibility Payment, or ESRP. This is the penalty charged when you don’t provide health coverage, or the health coverage you provide is unaffordable or does not offer minimum value.

What Leads to Letter 226-J?

The IRS has processed your 1094-C and 1095-C forms and determined that, based on the information provided by you and your employees, you are liable for an ESRP.

Your Next Steps

First, read the letter in its entirety. The IRS gives very specific directions regarding what to do if you agree or disagree with the information. Pay attention to the response date on the form and ensure that you have submitted your response with Forms 14764 and 14765 by that date.

Responding to the IRS

There are two forms you must submit when you respond to Letter 226-J. You can agree and make a payment, agree and wait to make a payment, or disagree and challenge the IRS’s decision.

Forms 14764 and 14765

Form 14764 is essentially agreeing or disagreeing with the IRS’s penalty assessment. You can also indicate whether you are including payment, making an EFTPS payment, or not making a payment. If you disagree, you will include that information in the next form.

Form 14765 is a form that includes all of your employees who received healthcare through the Marketplace and received a Premium Tax Credit as a result. Any month marked is a month in which the employee received the PTC, and you do not qualify for any safe harbor relief. However, if you disagree with the calculations or believe that a safe harbor applies, you can include additional information. If the penalty is the result of incorrect information on your 1094-C or 1095-C, you can include the changes you’d like to make in your response. However, Letter 226-J says you should not amend those forms with the IRS.

Timeline and Consequences of Your Responses

Pay attention to the “response date” listed at the top of your 226-J letter. You must submit Forms 14764 and 14765 by that date. If you do not, the IRS will assume their calculations are correct and send you a Notice and Demand for the ESRP listed. If you submit information disagreeing with their assessment, they will respond with some variation of Letter 227, indicating whether they agree or disagree with your proposed changes. Your ESRP may be eliminated completely, revised, or left as-is.

Best Practices for Compliance

Careful adherence to the Employer Mandate could potentially save your business thousands of dollars every single year. A few changes to your compliance strategies and your approach to health coverage offerings is often enough to catch errors before they lead to penalties.

Coverage Offerings and Employment Numbers

Ensure that the HR or compliance department of your company conducts regular reviews of your coverage offerings. They should be available to at least 95% of all employees and their dependents. If your business is near the limit for full-time employees, tracking your employment numbers throughout the year can help you prepare better for the year ahead.

Affordability and Minimum Value

It’s also important to ensure that the coverage you offer meets the minimum standards listed in the Employer Mandate. Calculate how much of your employees’ household income it makes up, checking that number against employees of different earning levels. You should also connect with your health insurance representative to verify that the plans you have selected meet the minimum value standard.

Accurate and Timely Reporting

In some cases, penalties are the result of inadequate documentation or missed deadlines. Keeping records on a monthly basis makes it far easier to submit your 1094-C and 1095-C forms in advance of the deadline.

The Employer Mandate does require additional work on the part of ALEs, but the IRS provides the information you need to stay compliant and provide employees with the health coverage they are legally entitled to. As a business owner, take steps to stay abreast of legislative changes, adjustments to penalties and requirements, and deadlines. If you’re struggling to stay on top of your company’s business tax needs, it’s time to find a business tax pro. Use our listings on TaxCure to explore your options.

FAQs

What qualifies an employer as an ALE under the ACA?

The ACA considers an employer to be an Applicable Large Employer if it had 50 or more full-time employees or full-time equivalent employees in the preceding calendar year.

How is the affordability of health coverage determined for ACA requirements?

The ACA considers a health plan affordable if it is less than 8.39% of an employee’s household income. Note that this percentage is adjusted each year, so your company may need to stay on top of new percentages if you are near the limit.

What are the consequences of failing to meet the ACA Employer Mandate?

Depending on which way you violate the Employer Mandate, you may be on the hook for $2,970 or $4,460 per full-time employee. The amount depends on whether you do not offer coverage to the required number of employers or the coverage is considered either unaffordable or not of minimum value.

How should an employer respond to Letter 226-J?

An employer who receives Letter 226-J should respond with Forms 14764 and 14765. These forms allow you to indicate whether you disagree or agree with the IRS’s assessment. If you disagree, it gives you space to provide information on why you disagree and which calculations are incorrect.

What is the purpose of IRS Forms 1094-C and 1095-C in ACA compliance?

Forms 1094-C and 1095-C allow the IRS to determine whether or not companies are compliant with the Employer Mandate. Based on the information included on those forms, they can assess penalties and look into your business operations to determine if you are compliant with other ACA requirements.

Am I considered an ALE as soon as my business reaches 50 full-time employees?

Your ALE status is based on the average number of full-time employees in the previous calendar year. Once you reach an average of 50 full-time employees in a calendar year, you are considered an ALE the following year.