As a certified public accountant (CPA) for a business owner, your role is important for ensuring your client makes smart and compliant business decisions. In addition to handling your client’s payroll and tax responsibilities, you may also be asked to provide guidance on new and proposed regulations that could impact their business and employee benefits.
One set of such regulations are the employer shared responsibility provisions (ESRP). These are also called 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. That way, you can best advise your clients through this health insurance regulation and help them avoid penalties for not offering appropriate employer coverage.
What is employer shared responsibility?
The ACA added the employer shared responsibility provisions in Section 4980H of the Internal Revenue Code in 2015. These provisions mandate 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. 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 and, therefore, subject to the ESRP. Organizations are responsible for self-determining whether they’re considered 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 are organizations that 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 a different calculation. A full-time employee is one that works, on average, 30 hours per week or 130 hours per month. An FTE is a measurement of the number of full-time hours worked by all full-time, part-time, and seasonal employees at an organization.
For some employers, aggregation rules apply in determining ALE status. An aggregated group, or controlled group, is made of employers, or members, with a common owner and are treated 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 requirements.
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, 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 payments below so you can better help your clients avoid any potential pitfalls.
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 2023, if an employer fails to meet this requirement and any full-time employee purchases individual health insurance, they’ll be subject to a shared responsibility payment of $2,880 per full-time employee minus the first 30 employees.
To paint a scenario, let’s say you have a client with 200 employees that doesn’t meet the MEC requirement. Suppose at least one full-time employee purchases tax-subsidized health insurance, such as with a premium tax credit, on the Health Insurance Marketplace. In that case, your client’s penalty will be $489,600.
The below table showcases the formula and the above example:
Total number of employees - 30 = new total of employees x 2023 penalty = total penalty
200 employees - 30 = 170 employees
170 employees x $2,880 = $489,600
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 payment, known as a 4980H(b) penalty.
An employer can incur a penalty if they fail to offer a qualified health plan that meets the minimum value and affordability requirements 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 health insurance 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.
Affordability regulations change annually based on an employee’s household income. In 2024, if the premium an employee pays for employer-sponsored coverage costs more than 8.39% of their annual household income, it’s not considered affordable coverage for that employee.
Employers generally don’t know their employees' household income. Therefore, they can use one or more of the affordability safe harbors based on information they would know. This can include the employee’s wages or pay rate to determine affordable coverage information.
The 2023 monthly penalty for employers offering a health insurance plan that doesn’t meet minimum value and affordability standards 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 amount can’t exceed the monthly penalty an employer would receive if they didn’t meet the coverage requirement by offering no employee health coverage.
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 and, if they did, information regarding the employee coverage 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 forms.
You use these 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 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 ongoing 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 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 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. This reduces the chance of errors and allows you to answer any questions they may have along the way.
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. Your direction will give your client peace of mind so they can run their business knowing they meet all the ACA guidelines and regulations.
This article was originally published on May 20, 2014. It was last updated on June 12, 2023.