IRS decreases employer mandate penalties for 2025

For the first time, the Internal Revenue Service (IRS) is reducing penalties for employers who don’t meet the federal government's requirements for health insurance. If you're a large business owner, you might be wondering how this affects your responsibilities and liabilities.

Applicable large employers (ALEs), or organizations with 50 or more full-time equivalent employees (FTEs), must meet the employer shared responsibility provisions (ESRP) of the Patient Protection and Affordable Care Act (ACA). This is commonly referred to as the employer mandate.

All ALEs, including nonprofits and government entities, must provide affordable health insurance coverage to at least 95% of full-time employees. The coverage must meet minimum value and minimum essential coverage (MEC) standards. If not, they may face potential penalties for noncompliance.

In this article, we'll go over health insurance requirements for ALEs and the 2025 employer mandate penalties.

In this blog post, you'll learn the following:

• Why ALEs must offer adequate health insurance coverage to employees.
• How the IRS is decreasing penalties for ALEs that fail to meet the employer mandate in 2025.
• The costly penalties for failing to offer MEC or affordable and minimum value health coverage.

What is the employer mandate?

The ESRP of the ACA is commonly called “the employer mandate.” The special rules within the employer mandate apply only to ALEs.

The ACA employer mandate requires ALEs to offer their full-time workers and their dependents affordable health coverage that meets MEC and minimum value. Otherwise, they must pay employer mandate penalties, also called shared responsibility payments.

If you’re not an ALE, you don’t have to offer your employees health coverage. You also don’t have to pay employer-shared responsibility penalties.

What are the employer mandate penalties for 2025?

The IRS recently decreased penalties for noncompliance in 2025. Employers are only subject to these noncompliance penalties if a full-time employee purchases subsidized coverage through the Health Insurance Marketplace or a state-based exchange using premium tax credits.

The 2025 ACA penalty amounts are as follows¹:

1. Section 4980H(a) penalty: ALEs must pay a monthly penalty of $241.67 or an annual penalty of $2,900 per employee. This penalty applies if they fail to offer MEC to 95% of their full-time employees and their dependents.
2. Section 4980H(b) penalty: ALEs must pay a monthly penalty of $362.50 or an annual penalty of $4,350 per employee. The penalty applies if they fail to offer affordable or minimum value coverage.
   1. The IRS considers your health plan affordable² as long as the employee contributions toward the benefit don’t exceed 9.02% of their annual household income.

If you’re an ALE with a penalty, the IRS will multiply the penalty by your number of full-time employees—not FTEs. Also, you can omit the first 30 full-time employees in that penalty calculation. So, while you’re an ALE if you have more than 50 FTEs, you’re only subject to a financial penalty if you have more than 30 full-time employees—not FTEs.

Employer mandate penalties for 2025 compared to previous years

In 2025, employers will see lower penalties related to the employer mandate. Steven Templeton, the CEO of PracticePro 365³, said this presents a new opportunity for employers.

"The penalty decrease marks the first time those restrictive requirements have been relaxed, and this could represent the beginning of a change in how the IRS will enforce employer health coverage," Templeton said. "Employers can see this as an opportunity to make some changes to their health benefit strategies as they no longer have to worry about imminent costly fines."

The chart below shows how penalties for noncompliance have changed over recent years.

Employers shouldn't use these savings as an excuse to provide inadequate coverage to employees.

"Even though the reduced penalties might relieve some financial burden, there is no reason to interpret this as a reason for reducing any benefits that have already been provided," Templeton said. "On the contrary, firms ought to make use of this leverage, and improve their reputation of being an employer of choice."

How do employers report compliance with the employer mandate?

Employers report that they're meeting the mandate using IRS 1094-C and 1095-C forms. The 1095-C form now includes affordability codes that employers offering an individual coverage HRA (ICHRA) use to show how they determined the allowance they provided gives employees affordable coverage. The ICHRA is a cost-effective alternative to a traditional group health insurance plan. It allows employers to reimburse employees for their medical care services and individual health insurance premiums.

States with the individual mandate, like California, New Jersey, Rhode Island, Vermont, and the District of Columbia, can complete Form 1095-C to satisfy the reporting requirement.

Conclusion

The health insurance industry is ever-changing. Therefore, employers must stay current on the latest ESPR compliance requirements, particularly the employer mandate penalties.

As the IRS decreases the penalty for employers subject to ACA requirements, ALEs have a chance to reevaluate current health benefit strategies. If you want to offer employer-sponsored health coverage that satisfies the mandate for 2025, PeopleKeep can help! Our HRA solutions are a cost-effective alternative to a traditional group plan.

PeopleKeep doesn't provide tax advice. This article is for informational purposes only. You should seek guidance from tax experts to reduce your compliance risks.

This article was originally published on November 2, 2022. It was last updated on October 24, 2024.

1. IRS Revenue Procedure 2024-14
2. HealthCare.gov Glossary
3. PracticePro365