As a certified public account (CPA), your role is important for business owners. In addition to handling your client’s payroll and tax responsibilities, keeping up to date with new, current, and proposed regulations that could impact their business and employee benefits is vital.
One such regulation is employer shared responsibility, also referred to as the employer mandate. This group of 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, so you can best advise your clients through this health insurance policy and help them avoid any penalties.
What is employer shared responsibility?
Under 4980H of the Internal Revenue Code, employer shared responsibility provisions were added to the ACA in 2015. These provisions mandated that employers classified as an applicable large employer (ALE) must offer health insurance coverage that’s affordable and provides minimum value to their full-time employees and their dependents or be 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 and subject to the ESRP. Organizations are responsible for self-determining on an annual basis whether they are considered an ALE and will need to follow the employer mandate.
Who is subject to employer shared responsibility?
Only ALEs are subject to employer shared responsibility provisions. Determining whether your client is an ALE depends on their company size. ALEs are organizations that employed an average of at least 50 full-time employees, including FTE employees, in the prior calendar year.
An FTE is an employee that works, on average, 30 hours per week or 130 employee hours per month. The number of FTEs at an organization is the combined number of full-time, part-time, and seasonal employees.
For some employers, aggregation rules apply in determining ALE status. An aggregated ALE group is a group of ALE employers, or members, with a common owner treated as a single employer. In these cases, full-time employees and FTEs for each member of the aggregated ALE group are combined to determine ALE status.
If an employer doesn’t qualify as an ALE, it’s not subject to the employer mandate and therefore won’t face penalties for not offering health insurance coverage. Due to the rise of small businesses, most employers fall short of the ALE employee size requirements.
Want to know how many FTEs are in your client’s organization? Download our worksheet
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 coverage, or offers coverage that isn’t affordable, they will trigger a penalty payment to the IRS.
Each shared responsibility payment varies based on the type of penalty accessed. Because 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 employer mandate penalty types below so you can better help your clients avoid any potential pitfalls.
Minimum essential coverage (MEC)
The first employer mandate penalty is regarding minimum essential coverage (MEC). To meet the MEC requirement, an employer must offer health coverage to at least 95% of its full-time employees and their dependents. If an employer fails to meet this requirement, a penalty of $2,880 per full-time employee minus the first 30 employees is incurred.
For example, if you have a client with 200 employees that doesn’t meet the MEC requirement, if at least one full-time employee purchases tax-subsidized health insurance through the health insurance exchange, your client’s penalty in 2023 will be $489,600 (200 - 30 × $2,880).
For aggregated ALE groups, whether an employer is subject to a penalty payment and the payment amount is determined separately for each member. Therefore, if one employer within an ALE group fails to offer MEC, the other group members aren’t affected.
Minimum value and affordability
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 penalty. This penalty is incurred if an employer fails to offer an employee health plan that meets the minimum value and affordability requirements.
A health insurance plan meets the minimum value requirement if it covers at least 60% of the total cost of benefits expected to be incurred under the plan and provides substantial coverage of inpatient hospitalization and physician.
In terms of affordability, those regulations change annually. In 2023, if the premium an employee pays for employer-sponsored coverage costs more than 9.12% of an employee's annual household income, the employer coverage isn’t considered affordable for that employee.
Employers generally don’t know their employees' household income, so they can use one or more of the affordability safe harbors based on information the employer would know, such as the wages or pay rate for that employee.
The 2023 monthly penalty for employers offering a health insurance plan that doesn’t meet minimum value and affordability requirements equals $4,320 divided by 12 for each full-time employee receiving subsidized coverage through a health insurance marketplace exchange for the month.
However, the penalty can’t be greater than the monthly penalty an employer would receive if they offered no employee health coverage.
Find out if the health insurance plan your client is offering is considered affordable
What are the employer shared responsibility information reporting requirements?
ALEs subject to the employer shared responsibility provisions are required to report to the IRS whether they offered coverage to ongoing employees and, if they did, information regarding the employee coverage provided. ALEs are required to report this information on Form 1094-C and Form 1095-C. Each member of an aggregated ALE group is also liable for filing 1095 forms.
These forms are used 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 sponsoring self-insured health coverage can generally use Form 1095-C to satisfy this requirement by filling out Part III on the form for their employees and family members enrolled in their employer-sponsored health coverage.
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 Relief. This condition allows the IRS to waive penalty assessments as the employer can provide legitimate reasons for missing a reporting requirement by the deadlines.
However, there’s no statute of limitations on ACA penalties. You could be penalized years in the future for filing inaccurate or late forms, so it’s essential to encourage your clients to file on time unless their situation expressly 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 to lessen the chance they make an error and answer any questions they may have on the process.
Conclusion
CPAs provide a wide range of accounting services to individuals and businesses in various industries. A successful CPA should know regulatory and legislative tax provisions, such as employer shared responsibility, to help their clients avoid pesky penalties.
Ultimately, you play a vital role in your client’s financial operations, ensuring compliance with the law and providing your clients with current and accurate information. The direction you provide will supply your client with peace of mind so they can run their business knowing they’re following all ACA guidelines and final regulations.
This article was originally published on May 20, 2014. It was last updated on May 6, 2022.
