The CPA's guide to employer shared responsibility
Health Benefits • March 4, 2024 at 9:15 AM • Written by: Elizabeth Walker
As a certified public accountant (CPA) for a business owner, your role is vital for ensuring your client makes smart and compliant business decisions. In addition to handling your client’s payroll and tax responsibilities, you may also need to assist with new and proposed regulations that could impact their business and ongoing employee benefits.
One set of such regulations is the employer shared responsibility provisions (ESRP). These are also called the employer mandate. This group of special provisions within the Affordable Care Act (ACA) calls for certain employers to offer adequate and affordable health insurance coverage to their full-time equivalent employees (FTEs) and their dependents.
This guide will tell you everything you need to know about employer shared responsibility. That way, you can best advise your clients through this health insurance regulation and help them avoid penalties for not offering appropriate employer coverage.
Takeaways from this blog post:
- CPAs play a crucial role in ensuring clients comply with ACA regulations and the employer shared responsibility provisions (ESRP), reducing the risk of errors and providing future guidance along the way.
- ESRP regulations require applicable large employers (ALEs) to offer affordable health insurance coverage to their full-time employees and their dependents or be subject to the 4980H(a) and 4980H(b) IRS penalties.
- CPAs must also ensure their clients file Forms 1094-C and Form 1095-C, which report on coverage employers offer to full-time employees and determine eligibility for premium tax credits. Filing these forms accurately and timely is crucial to avoiding IRS penalties.
What is employer shared responsibility?
The ACA added the employer shared responsibility provisions in Section 4980H of the Internal Revenue Code in 2015. These special provisions mandate that employers classified as applicable large employers (ALEs) must offer affordable health insurance coverage that provides minimum value to their full-time employees and their dependents. Organizations that don’t follow the mandate are subject to an Internal Revenue Service (IRS) tax penalty.
All common-law employers, including government and nonprofit organizations exempt from federal income taxes, can be ALEs subject to the ESRP. Organizations are responsible for self-determining whether or not they’re an ALE annually. If so, they will need to follow the employer mandate.
Who is subject to employer shared responsibility?
Only ALEs are subject to the employer shared responsibility provisions. Determining whether your client is an ALE depends on their company size. ALEs employ an average of 50 or more FTE employees in the previous calendar year.
While your client may consider a full-time employee someone who works at least 40 hours per week, the ACA uses different criteria. The ACA considers a full-time employee as someone who works, on average, at least 30 hours per week or 130 hours per month. An FTE is a unit of measurement describing the number of full-time hours worked by an organization’s full-time and part-time employees, including those who work on a seasonal basis.
For some employers, aggregation rules apply in determining ALE status. An aggregated group, or a controlled group, comprises all employers with a common owner as a single employer. In these cases, these organizations would combine their FTEs to determine ALE status.
If an employer doesn’t qualify as an ALE, it’s not subject to the employer mandate and won’t face penalties for not offering medical coverage. Due to the rising number of small businesses, many employers fall short of the ALE employee size requirements1.
What triggers the employer shared responsibility penalty?
As a CPA, the most important part of the employer shared responsibility provision for your client is the possible penalties. If your client is an ALE and doesn’t offer affordable coverage to their ongoing employees and at least one full-time employee gets a federal subsidy for health insurance, they’ll trigger a penalty payment to the IRS.
Each shared responsibility payment varies based on the type of penalty accessed. While the cost of providing health insurance coverage is tax-deductible for an employer, an employer shared responsibility payment isn’t federal income tax-deductible.
We’ll go over both types of penalties below so you can better help your clients avoid any potential payments.
Minimum essential coverage (MEC)
The first employer mandate penalty, also known as a 4980H(a) penalty, is regarding minimum essential coverage (MEC). To meet the MEC requirement, an organization must offer health coverage to at least 95% of its full-time employees and their dependents.
In 2024, if an employer fails to meet this requirement and any full-time employee purchases an individual health insurance plan with the help of a federal subsidy, they’ll be subject to a shared responsibility payment of $2,970 per full-time employee minus the first 30 employees.
In 2025, the penalty drops to $2,900 per full-time employee minus the first 30 employees.2
To paint a scenario, let’s say you have a client with 200 employees that doesn’t meet the MEC requirement in 2024. Suppose at least one full-time employee purchases tax-subsidized health insurance on the Health Insurance Marketplace, such as with a premium tax credit. In that case, your client’s penalty will be $504,900.
The table below showcases the payment calculation and the above example:
|
Formula |
Total number of employees - 30 = number of employees for penalty calculation New total of employees x per-employee penalty = total penalty amount |
|
Example |
200 employees - 30 = 170 employees 170 employees x $2,970 = $504,900 (2024) 170 employees x $2,900 = $493,000 (2025) |
The IRS determines whether a single employer within an aggregated group is subject to a penalty and the payment amount on an individual basis. This means that if a single individual employer within an ALE group fails to offer MEC, the other group members aren’t affected.
Minimum value and affordability requirements
Even if your ALE client offers MEC to at least 95% of its full-time employees, they could still fall subject to the second type of employer shared responsibility payment, known as a 4980H(b) penalty.
An employer can incur this penalty payment if they fail to offer a qualified health plan meeting the minimum value and affordability standards and at least one full-time employee obtains subsidized individual coverage through the Marketplace.
However, you only count full-time employees for this shared responsibility payment—not FTEs.
A qualified health plan meets the minimum value requirement if it covers at least 60% of the total cost of benefits expected under the plan and provides substantial coverage of inpatient hospitalization and physician services.
Affordability regulations change annually based on an employee’s household income. In 2024, if an employee's premium for employer-sponsored coverage costs more than 8.39% of their annual household income, the federal government considers it unaffordable coverage for that employee. The IRS decreased affordability to 9.02% for 2025.
Employers generally don’t know their ongoing employees' household income. Therefore, they can use one or more of the affordability safe harbors based on the information they know. This can include the employee’s wages or pay rate to determine affordable coverage information.
The 2024 monthly penalty amount for single employers offering a health insurance plan that doesn’t meet minimum standards and affordability guidelines equals $4,460 divided by 12 for each full-time employee receiving subsidized coverage through a health insurance marketplace exchange for the month.
The IRS decreased the penalty to $4,350 for 2025.
However, the amount can’t exceed the monthly penalty a single employer would receive if they didn’t meet the coverage requirement by offering no employee health coverage.
|
Formula |
4980H(b) penalty / 12 = Monthly penalty Monthly penalty x number of employees with subsidized coverage = Total monthly penalty |
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Example for a company with 200 employees, where 10 employees get subsidies |
2024: $4,460 / 12 = $371.67 $371.67 x 10 = $3,716.67 2025: $4,350 / 12 = $362.50 $362.50 x 10 = $3,625 |
In the example above, since the $3,716.67 monthly penalty is less than the $42,075 monthly penalty for not offering health insurance in 2024, the employer would only need to pay the larger penalty.
What are the employer shared responsibility information reporting requirements?
ALEs subject to the employer shared responsibility provisions must report to the IRS whether they offered coverage to ongoing employees. If they did, they must also include information regarding the type of employee coverage they provided. ALEs must report this information on Form 1094-C and Form 1095-C. Each member of an aggregated ALE group is also liable for filing 1095 tax forms.
You use these tax forms to determine whether an ALE owes an employer shared responsibility provision payment and whether employees are eligible for a premium tax credit. ALEs must also send each employee a Form 1095-C so they can save for their personal taxes.
An employer that sponsors self-insured health coverage has reporting requirement responsibilities as a provider of MEC, even if they aren’t considered an ALE. An ALE offering self-insured health coverage can generally use Form 1095-C to satisfy this requirement by filling out Part III on the form for their ongoing employees and family members enrolled in their employer-sponsored health coverage. Non-ALEs use Form 1095-B.
Filing late or inaccurate ACA information this year could cost you an IRS penalty. That’s one of the reasons IRS notice 2020-76 created the Good Faith Transition Relief3. This condition allows the IRS to waive penalty assessments if the employer can provide legitimate reasons for missing a reporting requirement by the deadlines.
However, there’s no statute of limitations on ACA penalties. The IRS can penalize employers years in the future for filing inaccurate or late forms. It’s essential to encourage your clients to file on time unless their situation warrants Good Fair Transition Relief.
As a CPA, you can help your client fill out these IRS forms as part of their employer shared responsibility reporting requirements. This reduces the chance of errors and allows you to answer any questions they may have along the way.
Conclusion
CPAs provide various accounting services to single individuals and businesses in various industries. A successful CPA should know regulatory and legislative tax provisions, such as employer shared responsibility, to help clients avoid pesky penalties.
Ultimately, you play a vital role in your client’s financial operations, ensuring compliance with the law and providing them with current and accurate information. Your direction will give your client peace of mind and future guidance so they can run their business knowing they meet all the ACA regulations.
This article was originally published on May 20, 2014. It was last updated on March 4, 2024.
1. https://www.oberlo.com/statistics/number-of-small-business-in-the-us
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Elizabeth Walker
Elizabeth Walker is a content marketing specialist at PeopleKeep. Since starting with the company in April 2021, she has become well-versed in writing about HRAs, health benefits, and small business solutions. Outside of her expertise in the healthcare benefits industry, Elizabeth has been a writer for more than 20 years and has written several poems and short stories. She's published two children’s books in 2019 and 2021, which she is developing into a series of collected works. Her educational background as a classical musician and love of the arts continue to inspire her writing and strengthen her ability to be creative.