By: HUB’s EB Compliance Team

The Affordable Care Act (“ACA”) employer mandate requires certain large employers to offer health insurance coverage meeting specified requirements to their full-time employees or potentially be subject to Employer Shared Responsibility Payments (“ESRP”). In a series of posts over the next few months, HUB will give a high-level overview of the mandate’s requirements.

Employers Subject to the Employer Mandate

Employers who average 50 or more full-time equivalent (“FTE”) employees during the prior calendar year are considered Applicable Large Employers (“ALE”) and thus subject to the employer mandate. Only employers who are ALEs are subject to the employer mandate. Except for employers not in existence in the previous calendar year who reasonably expect to employ 50 or more FTEs in their first year, ALE status is always based on the calendar year rather than the employer’s plan year.

Moreover, as the health coverage mandate applies based on ALE status during the prior calendar year, some employers could be uncertain of a final headcount number until late December and then immediately face mandate obligations starting January 1 of the “following” year (e.g. the next day). As a workaround to neutralize this penalty risk, the IRS applies a special “single use” hall pass of three months awarded to any “newly-minted” ALE. The one-time IRS hall pass effectively gives a new ALE three months to put a plan into place before penalties start applying, so long as they comply by April 1st.

Importantly, some employers who average 50 or more FTEs may still avoid ALE status designation if their employee count exceeds 50 for 120 days or fewer due to the employment of Seasonal Workers.

Mandate Requirements and Penalties

ALEs are generally required to offer Affordable, Minimum Value, Minimum Essential Coverage to their Full-Time Employees and offer Minimum Essential Coverage to dependent children to avoid penalties.

The first potential penalty is sometimes called the “A” Penalty. It is assessed under §4980H(a) of the tax code and applies when an ALE does not offer coverage to at least 95% of their full-time employees and is triggered when at least one full-time employee receives a Premium Tax Credit (“PTC”) or subsidy to purchase individual coverage through an ACA public exchange.

Penalties are assessed monthly based on the total number of full-time employees, minus the first 30 full-time employees. Employers who do not meet the 95% safe harbor for offering coverage cannot exclude their full-time employees who were offered coverage from penalty calculations.

Example: In 2023, ABC Corp has 125 full-time employees in July, but they only offer coverage to 100 of those employees. Penalties are calculated as follows:

125 full-time employees – 30 excluded employees = 95 employees

$2,970 annual A penalty amount (for 2024) / 12 months = $247.50

July penalty amount = 95 employees * $247.50 = $23,512.50

By contrast, the “B” Penalty under §4980H(b) applies for each month when an ALE offers coverage that is either unaffordable or does not meet minimum value requirements, or does not offer coverage to a full-time employee, and that employee receives a PTC to purchase individual coverage through an exchange.

Penalties will not apply under the B penalty to employees who do not receive a PTC to purchase individual coverage through an exchange, even if the employee was not offered coverage, or the coverage was not both affordable and minimum value. Initially, some ALE organizations implemented a “bare bones” or MEC health coverage offer strategy that hinged on a belief that most employees would not qualify for a federal tax credit. More recently however, the fact that richer and more broadly available federal subsidies are being awarded across the country has somewhat eroded that strategy’s effectiveness.

Example: In 2023, XYZ Corp has 135 full-time employees in September, but coverage is not affordable for 7 employees, of whom 3 receive a PTC to purchase coverage through the exchange. Penalties are calculated as follows:

Full-time employees offered coverage that is not affordable and receiving PTC to purchase coverage through the exchange = 3 employees

$4,460 annual B penalty amount (for 2024) / 12 months = $371.67

September penalty amount = 3 employees * $371.67 = $1,115.01

Note, employers are not penalized simply because the offer of coverage is not affordable. As we see in this example, only 3 of the 7 employees for whom coverage was unaffordable received a PTC and thus triggered penalties.

Importantly, the employer mandate only requires employers to offer coverage; it does not require employees to enroll in the coverage offered. In other words, merely the offer is enough to avoid penalties.

Employee classification is an important part of compliance with the ACA’s employer mandate as failure to offer coverage to coverage to even one full-time employee could cause an employer to fail to meet the provisions of the 95% safe harbor. For purposes of crediting hours of service and determining which employees should be offered coverage under the employer mandate, employees are categorized as either full-time, part-time/variable hour, or seasonal (as defined by the ACA).

Conclusion

Employers who are just becoming ALEs need to consider the compliance implications given the potential penalties involved. The ACA employer mandate can be complex. In future articles in this series, HUB will examine other aspects of the mandate, including who is a full-time employee, measurement periods, and various other aspects of the mandate.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your organization’s particular needs.