The Affordable Care Act (ACA) requires employers with at least 50 employees¹ in the preceding year to provide minimum essential coverage to at least 95 percent of their full-time employees and dependent children to age 26² that is both affordable and provides minimum value, or face potential penalties. The ACA Shared Responsibility for Employers Regarding Health Coverage rule, also known as the employer mandate, introduces methods to determine which companies are subject to the rule and how to calculate potential penalties.

An employer subject to the employer mandate would not face a penalty unless at least one full-time employee buys coverage on an exchange established under the ACA and receives a premium tax credit or cost-share subsidy when doing so.

Penalties 

• If the employer fails to offer minimum essential coverage and any full-time employee receives a premium tax credit or cost-share subsidy when purchasing individual health coverage on an exchange, the employer’s penalty is $2,970 per year or $247.50 per month for 2024 ($2,900 per year or $241.67 per month for 2025) multiplied by the total number of full-time employees, not counting the first 30. 

• If the employer offers minimum essential coverage, but that coverage is unaffordable or does not provide minimum value, and any full-time employee receives a premium tax credit or cost-share subsidy when purchasing individual health coverage on an exchange, then the penalty is $4,460 per year or $371.67 per month for 2024 ($4,350 or $362.50 per month for 2025) multiplied by the number of full-time employees who receive a premium tax credit or cost-share subsidy when purchasing individual health coverage on an exchange (capped at the penalty amount that would apply had the employer not offered any coverage at all). 

• The determination of who is a full-time employee, and therefore the amount of any potential penalty, is determined on a month-by-month basis. 

Affordable coverage – Employer-sponsored health coverage is considered affordable if an employee’s required contribution to the plan does not exceed 9.12 percent in 2023 of the employee’s household income for the taxable year. (Rather than trying to determine household income, there are three safe harbors to use to determine whether an employer-sponsored health plan is affordable.) 

Important terms to know

Affordable coverage – Employer-sponsored health coverage is considered affordable if an employee’s required contribution to the plan does not exceed 9.69 percent in 2017 (9.56 percent in 2018) of the employee’s household income for the taxable year. (Rather than trying to determine household income, there are three safe harbors to use to determine whether an employer-sponsored health plan is affordable.)

Minimum essential coverage – Minimum essential coverage refers in general to health coverage under a government-sponsored program, such as Medicare or Medicaid; an eligible employer-sponsored plan; a plan offered in the individual market; or other coverage described in applicable regulations. It does not include HIPAA-excepted benefits such as critical illness or hospital indemnity insurance.

Minimum value – A group health plan provides minimum value if the percentage of the total allowed costs of benefits provided under the plan is at least 60 percent, and it includes substantial coverage of both inpatient hospital and physician services
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Premium tax credit – Federal dollars that offset some or all of the amount of premium an eligible individual would otherwise have to pay

Cost-share subsidy – Federal dollars reducing the amount an eligible individual would otherwise pay out of pocket for coinsurance and copayments

IRS FAQ Addresses Employer Mandate Payments

The Internal Revenue Service has provided answers to common questions about the employer mandate and potential penalties. Here are updated questions with summarized answers:

Q: How does an employer know that it owes an employer shared responsibility payment?
A: The general procedures the IRS will use to propose and assess the employer shared responsibility payment are described in Letter 226J. The IRS plans to issue Letter 226J to an applicable large employer if it determines that, for at least one month in the year, one or more of the applicable large employer’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the applicable large employer did not qualify for an affordability safe harbor or other relief for the employee).

Q: Does an employer that receives a Letter 226J proposing an employer shared responsibility payment have an opportunity to respond to the IRS about the proposed payment, including requesting a pre-assessment conference with the IRS Office of Appeals?
A: Yes. Applicable large employers will have an opportunity to respond to Letter 226J before any employer shared responsibility liability is assessed and notice and demand for payment is made. Letter 226J will provide instructions for how the applicable large employer should respond in writing, either agreeing with the proposed employer shared responsibility payment or disagreeing with part or all or the proposed amount.

Q: How does an employer make an employer shared responsibility payment?
A: If, after correspondence between the applicable large employer and the IRS or a conference with the IRS Office of Appeals, the IRS or IRS Office of Appeals determines that an applicable large employer is liable for an employer shared responsibility payment, the IRS will assess the employer shared responsibility payment and issue a notice and demand for payment, Notice CP 220J.

Q: When does the IRS plan to begin notifying employers of potential employer shared responsibility payments?
A: For the 2015 calendar year, the IRS plans to issue Letter 226J informing applicable large employers of their potential liability for an employer shared responsibility payment, if any, in late 2017.

Follow this link to the IRS FAQ about the employer mandate.

Follow this link to review the complete answers to updated questions about the employer mandate and potential penalties. (Questions 55 through 58)