How Well Do You Understand the ACA Employer Mandate?

Photo of a page of Affordable Care Act legislation

One of the principal provisions of the Affordable Care Act (ACA) is the Employer Mandate, also called the employer shared responsibility provision. It requires employers with 50 or more full-time (or full-time equivalent) employees to provide coverage that is affordable, provides minimum essential coverage, and meets minimum value requirements to 95% of their full-time employees, or be subject to penalties.

The Affordable Care Act (ACA) was enacted in March 2010 to address comprehensive health care reforms. It was designed to make healthcare more affordable and available to more people. It also mandated coverage for pre-existing conditions and allowed children up to 26 years old to remain on their parent's insurance policy.

In 2014, the employer shared responsibility provisions, also called the employer mandate, went into effect. The employer mandate requires employers with 50 or more full-time (or full-time equivalent) employees to provide coverage that is affordable, provides minimum essential coverage, and meets minimum value requirements for 95% of their full-time employees.

The employer mandate demands a lot from employers, including:

  • Knowing and understanding who their full-time (or full-time equivalent) employees are
  • Offering them timely and affordable health insurance coverage
  • Documenting offers of health insurance coverage
  • Completing reporting requirements for both the IRS and applicable states based on differing requirements, rules, timelines and technology specifications

Penalties for non-compliance can be steep

The employer mandate applies to employers with an average of at least 50 full-time employees or full-time equivalents during the prior year. Employees are considered full-time if they work 30 or more hours a week. The ACA includes penalties for employers who don't offer health insurance coverage, or who don't offer coverage that meets certain standards, to eligible individuals.

Employers who fail to comply on a timely basis, or who fail to properly document compliance, may face substantial financial penalties. There are two different penalties – the 4980H(a) penalty and the 4980H(b) penalty.

Why would an employer receive the 4980H(a) penalty?

Employers receive the 4980H(a) penalty when they:

  • Fail to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees or full-time equivalents (FTEs) and their dependents and
  • Have at least one FTE who is receiving a Premium Tax Credit (PTC) for obtaining coverage through the Marketplace

What is the dollar amount of the 4980H(a) penalty?

For the 2023 tax year, the 4980H(a) monthly penalty is $2,880 divided by 12 for each full-time employee.

Who receives the 4980H(b) penalty?

An employer receives the 4980H(b) penalty if they meet all of these three conditions with respect to full-time employees:

  1. Failure to offer coverage that meets the ACA Minimum Value (MV) requirements
  2. Failure to offer coverage that is affordable (the premium amount/employee contribution exceeds the ACA affordability threshold of 9.12% for 2023)
  3. Even one employee receives a PTC through the Marketplace

What is the dollar amount of the 4980H(b) penalty?

The 4980H(b) monthly penalty for the 2023 tax year is equal to $4,320 divided by 12 for each full-time employee who is receiving the PTC.

Can an employer receive both penalties in the same month?

No. An employer can receive the 4980H(a) penalty or the 4980H(b) penalty each month but not both in the same month.

Failure to file penalties

Employers are required to pay penalties for not filing, filing late or incorrectly filing Forms 1094/1095-C. The IRS uses the information on these forms to track ACA compliance and to identify employers who may be liable for employer shared responsibility penalties.

Who receives Form 1095-C?

IRS Form 1095-C is provided to full-time employees or FTEs and those enrolled in a self-insured plan.

Who receives Form 1094-C?

The IRS receives Form 1094-C, which accompanies the 1095-C forms that you send to the IRS.

What is the penalty for failing to furnish and/or file Forms 1094/1095-C?

For forms due in 2023, the penalty for failing to file either form is $290 per return, up to $3.532 million for each employer. And these penalties can be stacked, so if you fail to furnish an employee with a correct 1095-C and you fail to file the form with the IRS, your penalty will be $580 per employee.

Many employers may not have received penalty notices from the IRS related to their ACA filings yet; however, the recently enacted Inflation Reduction Act of 2022 provides the IRS with an additional $80 billion for increased enforcement. If you factor in the end of good faith transition relief for incorrect filings in 2020, the likelihood of receiving proposed penalty notices increases for employers subject to the employer mandate and associated reporting requirements.

ACA compliance is complex

As you can see, the ACA is quite complicated, and penalties can be high for companies that do not meet the applicable requirements. Meeting the demands of the employer mandate on a timely basis, along with federal and state health coverage reporting requirements, is essential to avoid potentially steep ACA compliance-related penalties.

Adding to the complexity of ACA legislation are varying state reporting requirements, focused on the employee's residence rather than the place of work, with deadlines, formats and other state employer health care compliance requirements, which vary from state to state. This is further complicated by many employees moving to remote work, living in states that may not previously have been considered in light of ACA mandates.

The ACA employer mandate is complex and complicated. Penalties for non-compliance can be substantial and you may not be prepared for what you have to pay. Without the proper resources, going it alone can be risky, so you may want to explore the benefits that the ADP SmartCompliance® Health Compliance solution can offer to help ensure you remain compliant.

If you want to get an idea of what your potential penalties might look like, our penalty calculator can help you.

Related: Maintaining ACA Compliance in 2023: Your Questions Answered