What is the Employer Mandate?
The ACA’s Employer Shared Responsibility provisions (IRC §4980H), often called the employer mandate, apply only to Applicable Large Employers (ALEs). ALEs are generally employers that averaged 50 or more full-time employees, including full-time equivalents (FTEs), during the prior calendar year.
Under the employer mandate, an ALE may owe a penalty if it doesn’t offer coverage that meets certain standards to its full-time employees and their dependent children up to age 26.
What the Employer Mandate Looks At
The employer mandate looks at three things about the coverage an ALE offers:
- Is coverage offered? Minimum Essential Coverage (MEC) offered to at least 95% of full-time employees and their dependent children
- Is it affordable? The employee’s premium contribution for the lowest-cost self-only plan (employee-only rate) doesn’t exceed the IRS’s annual affordability percentage
- Does it provide minimum value? The plan pays at least 60% of the total allowed costs of covered benefits (Minimum Value). In the Small Group market, plans at the Bronze level or higher are treated as providing minimum value.
The Two Penalties
A penalty is only possible if at least one full-time employee enrolls in Marketplace coverage and receives a Premium Tax Credit (PTC) they qualify for.
- §4980H(a) – “No Coverage” Penalty: May apply if an ALE doesn’t offer MEC to at least 95% of its full-time employees and their dependents. It’s calculated on all full-time employees, minus 30.
- §4980H(b) – “Unaffordable or Inadequate Coverage” Penalty: May apply if an ALE meets the 95% test, but a full-time employee receives a PTC they qualify for because the coverage offered wasn’t affordable or didn’t provide minimum value. It’s calculated only for those employees, and it can’t exceed what the §4980H(a) penalty would have been.
Penalties are calculated month by month, and the dollar amounts are adjusted every year. See Employer Mandate Penalties for current amounts.
Keep in mind: Employees sometimes receive advance PTC payments they don’t actually qualify for. For example, they may report on their Marketplace application that their employer’s coverage isn’t affordable when it is. Because the employer’s offer is measured by objective IRS rules, an employee’s answer on the application doesn’t decide whether the employer owes a penalty. If the IRS raises a potential penalty, the employer typically has a chance to respond with information about its offers of coverage. See Employer Mandate Penalty Enforcement Process.
Annual Reporting
After each calendar year, ALEs file Forms 1094-C and 1095-C with the IRS, and provide Form 1095-C to full-time employees, or make it available. Reporting is required even for ALEs that offered coverage to everyone.
The IRS uses this information to determine whether a penalty may apply and to check employees’ eligibility for Premium Tax Credits. See Employer Reporting Overview for more.
Important: This information is provided for general educational purposes. It is not legal or tax advice. How these rules apply depends on each employer’s specific circumstances, so employers should review their situation with their own legal counsel, ERISA attorney, CPA or tax advisor.