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Employer mandate - What happens if we don't offer health insurance?

Written by: Jordan Berkenpas
January 20, 2021 at 11:26 AM

As of 2021, the Affordable Care Act’s (ACA’s) employer shared responsibility provision states that organizations employing an average of 50 full-time employees are considered applicable large employers (ALEs). These organizations are required to offer minimum essential coverage (MEC) to 95% or more of full-time equivalent employees and their dependents. ALEs are also required to offer coverage that provides minimum value and is affordable to all their full-time employees. This requirement is called the employer mandate.

ALEs that don’t meet the employer mandate are subject to significant penalties. This article explains how to calculate the number of full-time employees, explores the requirements of the employer mandate, and describes the penalties for not meeting the requirements.

How to calculate the number of full-time employees

The IRS defines full-time employees as employees who work 30 average hours or more per week within a specific month. To determine if an organization is considered an ALE, the organization must include all full-time employees and the full-time equivalent of its part-time employees.

To calculate the full-time equivalent of part-time employees, an organization should add the total number of hours worked by all part-time employees and divide the total by (120).

If the sum of the full-time employees plus the full-time equivalent of the part-time employees is equal to 50 or more in the previous calendar year, the company is considered an ALE.

What’s MEC?

MEC is the least amount of health insurance coverage an ALE is required to provide to 95% of full-time equivalent employees to avoid paying the highest penalties.

To avoid paying the maximum fine, ALEs must offer their employees the ability to enroll in MEC through an eligible plan, which is:

  • Any plan or coverage offered in the small or large group market within a state (including small business exchanges)
  • Coverage under a grandfathered health plan
  • Any qualified health plan certified by the Health Insurance Marketplace (including individual health plans)

The penalty for not offering MEC

Any ALE who doesn't offer MEC to 95% of full-time equivalent employees will be required to pay a penalty if one or more full-time employees enroll in coverage through a health insurance exchange and also qualify for a premium tax credit.

To determine the amount of the penalty, employers need only count full-time employees in excess of 30. (For example, an organization employing 50 employees subtracts 30 from their total, equalling 20 employees to calculate the penalty).

In 2021 the annual penalty is set at $2,700 per employee.

To get the monthly per employee penalty, employers can divide the annual penalty by 12.

To get the total monthly penalty, employers should multiply the number of full-time employees employed during a given month minus 30 by the monthly per-employee penalty.

Looking for an alternative to group health insurance that meets MEC requirements? Learn about the individual coverage HRA

Here’s an example:

In January 2021, Jamestown Millworks employed 60 full-time employees and didn’t offer appropriate health coverage to 95% of their full-time equivalent employees. Due to the lack of coverage, multiple employees enroll in a plan through their local health insurance exchange.

The annual per-employee penalty is $2,700.

The calculation for the monthly per employee penalty is $2,700*(1/12).

In this calculation, we need only include 30 full-time employees due to the 30-employee credit.

The calculation for the total monthly penalty, in this case, is 30*2,700(1/12) which equals $6,750.

The employer mandate can be met by offering a group health insurance plan through the small or large group market in any given state. Since the individual coverage health reimbursement arrangement (ICHRAs) is available, employers are now able to meet the mandate by offering an ICHRA.

With an ICHRA, organizations of any size can reimburse employees tax-free for individual health insurance premiums and other medical expenses. Luckily, any insurance plan employees enroll in from the marketplace will automatically meet the requirements for MEC. That still leaves the affordability aspect.

Need a quick reference to understand how an ICHRA works? Download our one-pager

What qualifies as affordable coverage?

Any plan or coverage offered in the small or large group market will be an affordable plan for the purposes of the employer mandate.

For employers offering an ICHRA, to have their contribution considered affordable, the cost of health insurance for an employee can’t be more than 9.78% of the employee’s household income, using the lowest-cost silver plan on the local exchange as the baseline. That means the monthly premium for the lowest-cost silver plan, minus the monthly allowance being offered, can’t cost more than 9.78% of the employee’s household income for the same month.

The penalty for not offering affordable or minimum value coverage

An ALE that offers MEC to 95% of full-time equivalent employees might still be required to pay a penalty if the coverage is not affordable or doesn’t provide minimum value for one or more employees. As with MEC, minimum value and affordability are already included in traditional group health insurance plans.

For employers, offering an ICHRA it’s important to make sure affordability and minimum value are considered. To participate in an ICHRA, employees must purchase individual coverage from an exchange or the private individual market that is compliant with PHS Act sections 2711 and 2713. They can also purchase a Medicare policy if eligible for one. This means that in practice, the minimum value requirement won’t be an issue for employers offering an ICHRA. That being said, employees should have a clear understanding of what plans they can choose from.

The following plans don’t currently meet minimum values for the purposes of an ICHRA plan:

  • Short-term medical plans
  • Ministry sharing plans
  • Tricare

Fortunately, these plans aren’t considered individual coverage and an employee enrolled in these plans will not be eligible to participate in an ICHRA. With this knowledge, employees can make their healthcare purchases and accept or reject the ICHRA offering.

If an employer offers an ICHRA, and one or more of their full-time employees receives a premium tax credit due to an offer of unaffordable coverage, the employer is subject to pay a penalty. This is the same penalty assessed for not meeting minimum value.

The annual per-employee penalty for offering unaffordable coverage for 2021 is $4,060.

To get the monthly per employee penalty, employers can divide the annual penalty by 12.

To get the total monthly penalty, employers can multiply the number of full-time employees that are receiving a premium tax credit by the monthly per-employee penalty.

Let’s look at another example:

In February 2021, Ballenger Renovations employed 60 full-time employees and offered an ICHRA to all full-time employees. The allowance they offered was unaffordable for three employees based on their household income and the cost of the lowest-cost silver plan in their area. They opted out of the ICHRA and received premium tax credits from the federal government. In this case, the business must pay a penalty for the three employees offered unaffordable coverage.

The annual per employee penalty is $3,860.

The calculation for the monthly per-employee penalty is $4,060*(1/12).

The calculation for the total monthly penalty in this case is 3*$4,060*(1/12) which equals $1,015.

Conclusion

Along with employee attraction and retention, it’s important for ALEs to offer an affordable and health plan to avoid costly penalties. The sometimes staggering costs of offering a traditional health benefit can be offset with more affordable and flexible options like an ICHRA. The financial investment in the right health benefit will not only help you avoid penalties but increase employee satisfaction and retention.

This article was originally published on July 12, 2010. An updated version was posted on January 20, 2021.

Topics: Group Health Insurance, Affordable Care Act, Employer Funded Health Insurance

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