Compliance | Health Care Reform | Mitigate Your Exposure to ACA “Shared Responsibility” Penalties

ADP Research Institute®


Mitigate Your Exposure to ACA “Shared Responsibility” Penalties

This insight is from: "Planning For Health Care Reform: How Income Impacts Employee Health Benefits Participation"


Health Care Reform began a new chapter in 2013 with more regulations to govern the implementation of the Affordable Care Act (ACA). This white paper – the second in a series from the ADP Research InstituteSM on the ACA – focuses on the relationship between employee income and plan participation rates, and discusses how substantial tax penalties are encouraging ACA compliance measures.

“Shared Responsibility” Requirements Power the Engine of Health Care Reform

The ACA’s Shared Responsibility requirements are among the most significant and complex provisions of the ACA. They place a responsibility on individuals to obtain at least a minimum level of health care coverage and on employers to offer their employees an affordable health plan that provides a minimum value.

  • Most individuals are responsible for acquiring minimum essential coverage, either through an employer-sponsored group plan, an individual plan, or other coverage, such as Medicaid. Individuals who do not obtain such coverage may face tax penalties.
  • Employers with more than 50 full-time employees (or their equivalent) are also liable for tax penalties if they do not provide affordable, minimum value coverage and one or more of their full-time employees’ purchases subsidized coverage through a public health care exchange.

ACA Penalties – More Prevalent in Certain Industries

Some businesses with high labor costs and narrow profit margins – such as retail, hospitality, logistics, and long-term care – are likely to face a higher exposure to ACA tax penalties. These employers tend to have a high proportion of lower-wage, full-time employees who do not currently elect health benefits, as well as part-time employees who could be reclassified as full-time employees beginning in 2014.

For many of these workers, their employer’s group health plan might be “unaffordable.” This could activate ACA penalties for the employer, if these employees receive subsidies to purchase coverage through a public health care exchange. In addition, the financial impact of penalties can be significant enough to impact the employer’s bottom-line performance.

The 9.5% Threshold

The proposed regulations interpreting Shared Responsibility establish 9.5% of an individual’s wages as one of the “affordability thresholds” for employer-sponsored health care coverage. Research released by the ADP Research Institute reveals that 8.6% of single individuals working full-time paid more than 9.5% of W-2 wages to cover the cost of their health care premiums. The data also suggests a similar percentage applies to married individuals.  Question: Where does your company stand?

Calculating the ACA’s Financial Impact

The ACA penalty potential can easily turn into huge numbers that may affect profitability.

For instance, an employer who does not offer affordable, minimum value coverage – but has at least one employee who purchases subsidized coverage through a public exchange – faces a penalty of $2,000 per year for each full-time employee (less the first 30). A company with 1,000 employees translates into an employer tax penalty of nearly $2 million per year if even one employee purchases subsidized coverage through a public exchange.

Offering minimum value coverage to all employees can create another problem, if the coverage is not affordable. If an employee cannot afford the cost of coverage, the employer would have to pay $3,000 per year for each employee who elects to purchase subsidized coverage from an exchange.

Managing Your Company’s Exposure to ACA Penalties

As an employer with a group health plan, you can attempt to manage the impact of ACA penalties by adjusting your plan designs and premium options to optimize employee participation rates. As you strategize your approach to ACA penalties, ask yourself these questions:

  • Is there an income threshold below which an employee is unlikely to purchase health insurance from your company or from a public exchange? If so, how many employees do you have under that threshold?
    Note: These employees might present less of a liability if they do not trigger penalties by going to a public health care exchange for coverage.
  • How many of your employees pay more than 9.5% of their wages to obtain employer-sponsored health care coverage?
    Note: This number can define for you how much you may need to adjust your current benefits offering.
  • Are there certain groups of employees in your company who may benefit from obtaining subsidized coverage through a public exchange?
    Note: This information can help you weigh the cost of whether it pays to incur a penalty or try to provide something of value to those employees.

Future regulations will continue to change the regulatory landscape. Keeping up with ongoing ACA changes not only involves knowledge, but also skill. Know your options and their merits. Moreover, estimating future rates of participation in your company-sponsored health care plan is an important variable when it comes to managing your future health benefits costs – including how much you may have to pay in ACA tax penalties.

*A complete list of sources and citations can be found in the full report.

About This Report: Conducted by ADP Research Institute, a specialized group within ADP, this study is based on 2012 actual, aggregated and anonymous employee-level data from approximately 300 ADP health and benefits clients. All states and major industries are covered, as well as employee gender, age, and marital status. Each of the companies in the study has 1,000 or more employees, including both full-time and part-time workers. Due to the small data set population of union employees, only nonunion employees are considered in this analysis.

Keywords: Compliance, Health Care Reform

Business Types: Research for Small Organizations, Research for Midsized Organizations, Research for Large Organizations

Roles: Research for Human Resources Professionals

Planning For Health Care Reform: How Income Impacts Employee Health Benefits Participation

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