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The Employer Mandate

The employer mandate, also known as the Employer Shared Responsibility provisions of the Affordable Care Act, aims to reduce the number of uninsured people in the U.S. by encouraging employer-sponsored health coverage.

The information found in these guides is a general guideline and should not be considered legal or tax advice. Visit the IRS website for more detailed information about making ALE determinations. Employers should consult with experienced legal counsel if they have questions; Zenefits cannot and does not provide legal or tax advice.

Employer Mandate Overview

As part of the employer mandate, employers of a certain size are required to track employee hours and offer coverage to employees and their dependents up to age 26 as they become eligible. In addition, these employers must file IRS forms on an annual basis to demonstrate that they are in compliance with the ACA.

Tracking Hours

The employer mandate requires employers to retain information on the hours worked by all employees, regardless of whether they are full-time or part-time, salaried or hourly. Companies will need to track hours for all employees and submit filings to the IRS for all employees the ACA treats as full-time.

For companies already offering insurance coverage for full-time employees, the only change is that under the ACA, companies will now be obligated to offer coverage to any employee who is expected to work or actually works a certain number of hours over a period, which might be different than a company's current full-time employee definition.

Is proof of coverage communicated to employees by carriers or employers and if so, how?

  • For companies under 250 employees, no proof will be specifically transmitted, but if an employee gets audited, they can use the documentation described on this page under "Proof of Insurance."
  • If a company has over 50 full time employees, the employees will get a 1095-C Form.
  • If a company has over 250 W-2 employees, they will give employees W-2 information.
Employer Mandate Two-Part Test

The employer mandate is a two-part test that applies to Applicable Large Employers and ensures that they are offering affordable medical insurance to their eligible “full-time” qualified employees.

The ACA requires that plans offered by employers fit the following criteria:

  1. Offer minimum essential coverage to at least 95% of its full-time employees and their dependents up to age 26; and
  2. Offer affordable minimum value coverage to 100% of its full-time employees and their dependents up to age 26.

    The Minimum Value Coverage test only applies to Applicable Large Employers that pass the first test. If a company failed the first test, they would most likely fail the second test, as it is a more difficult threshold to meet.

What Are Employer Mandate Penalties?

The employer mandate requires that Applicable Large Employers meet the established requirements for Minimum Essential CoverageAffordability, and Minimum Value Coverage. Each of those requirements has its own penalty.

Penalties are triggered when a company fails to comply with a requirement, and at least one of its full time employees receives a tax credit to purchase insurance on the individual marketplace. In addition, there are also penalties related to a company’s failure to submit the proper IRS filings.

Form-related failures (e.g., incorrect information, failure to submit filings, etc.) will result in penalties up to $280 per return. The IRS can assess this penalty twice for each full-time employee -- once if the statement is not provided to the employee, and another time if the statement is not filed with the IRS. Also, increased penalties apply if the employer intentionally disregards the filing requirement. Learn more.

Zenefits is unable to advise on individual penalty estimates, please reach out to a tax advisor with these inquiries.

Penalties are applied on a monthly basis, and calculated as follows:

  • Minimum Essential Coverage (MEC) Penalty: $2750 (2022) per year multiplied by the number of full-time employees at the company (minus the first 30 employees). It was $2700 in 2021.
    • Penalties are calculated on a monthly basis.
  • Affordable Minimum Value Coverage (AMVC) Penalty: $4120 (2022) per year for every full-time employee who purchased insurance on the individual marketplace for that month. It was $4060 in 2021.
    • Penalties are calculated on a monthly basis.
    • This penalty will only be applied in instances where the Minimum Essential Coverage penalty is not applied. If a company fails to comply with Minimum Essential Coverage requirements and triggers the Minimum Essential Coverage penalty, the Affordable Minimum Value Coverage penalty will not be applied.
    • If a company complies with the Minimum Essential Coverage requirements and does not trigger the Minimum Essential Coverage penalty, then it’s still possible that they could trigger the Affordable Minimum Value Coverage penalty.
    • The Affordable Minimum Value Coverage penalty cannot exceed the maximum possible Minimum Essential Coverage penalty.

Click here to view example ACA Penalty calculations.

Employer Mandate Penalty Calculation Examples

If a company does not meet the employer mandate requirements, including offering eligible employees Minimum Essential Coverage and Minimum Value Coverage, they will be subject to penalties. For an idea of how employer mandate penalties are calculated, see the examples below.

Example 1

Company X had 150 full-time employees. They offered Minimum Essential Coverage (MEC) to 100 full-time employees. Of the 50 full-time employees who were not offered MEC, 40 employees purchased insurance in the individual marketplace, and at least one of those employees received a tax credit.

  • Minimum Essential Coverage (MEC) Penalty: Company X only offered Minimum Essential Coverage to 100/150 full-time employees, or 66%. They did not meet the 95% threshold.

    Because 40 full-time employees purchased insurance in the marketplace, and at least one received a tax credit, the Minimum Essential Coverage penalty is triggered.
    • ($2750/ 12 months) * [(150 - 30)] = $27,500  per month
    • This number assumes that at least one employee received tax credit for the entire calendar year.
       
  • Affordable Minimum Value Coverage (AMVC) Penalty: Because Company X did not pass the Minimum Essential Coverage test, triggering the Minimum Essential Coverage penalty, there is no need to look at whether the Affordable Minimum Value Coverage penalty applies.
    • Minimum Essential Coverage is a lower threshold than Affordable Minimum Value Coverage, so if Minimum Essential Coverage is not met, Affordable Minimum Value Coverage is necessarily not met. Only the Minimum Essential Coverage penalty would be applied in such a scenario.

Example 2

Company Y had 150 full-time employees. They offered MEC to 148 FT employees. All 2 of the FT employees who were not offered MEC purchased marketplace insurance and received tax credits.

  • Minimum Essential Coverage (MEC) Penalty: Company Y offered Minimum Essential Coverage to 148/150 full-time employees, or 98. 6 %. They met the 95% threshold. This penalty does not apply.
     
  • Affordable Minimum Value Coverage (AMVC) Penalty: Because Company Y passed the Minimum Essential Coverage test and did not trigger Minimum Essential Coverage penalties, we can now check to see if the Affordable Minimum Value Coverage penalty applies.

    Company Y did not offer Affordable Minimum Value Coverage to all full-time employees, and because all 2 of these full-time employees purchased marketplace insurance and received tax credits, the Affordable Minimum Value Coverage penalty is triggered.
    • ($4120 / 12 months) * (2) = $686.67 per month
    • This number assumes that all 2 employees received tax credit for the entire calendar year.
Determining the Best Plan Offered

To determine whether a plan provides affordable coverage, the IRS only examines the “best” plan offered by the employer.

The best plan offered refers to:

  1. A plan that offers coverage for the employee and child dependents.
    • If none of the plans offer coverage for child dependents, the best plan determination starts with Step 2 below.
  2. That has the highest level of coverage.
  3. Within the highest level of coverage, has the highest level of affordability, meaning it is the cheapest.
    • To determine the price of the employee contribution, look to the premium for self-only coverage (meaning the contribution required to cover the employee only, and not his or her dependents).

Example 1

For example, if Company X offered the following plans:

  • Plan A (Minimum Essential Coverage) -- covers child dependents
    • Self-only employee contribution = $100/ month
  • Plan B (Minimum Value Coverage) -- covers child dependents
    • Self-only employee contribution = $120/ month
  • Plan C (Minimum Value Coverage) -- covers employee only
    • Self-only employee contribution = $110/ month

The company would select Plan B and use the $120/ month self-only employee contribution amount against an employee’s income to determine the affordability of the plan. This is because Plan B covers child dependents (whereas Plan C does not).

Of the plans that cover child dependents, Plan B offers a higher level of coverage than Plan A because Plan B is Minimum Value Coverage (rather than Minimum Essential Coverage).

Typically, using Plan C could result in the highest penalty because it does not offer coverage to dependents, which could trigger the Minimum Essential Coverage penalty.

Example 2

Here is another example where the company offers only Minimum Essential Coverage plans -- not Minimum Value Coverage, which has a higher level of coverage.

  • Plan A (Minimum Essential Coverage) -- covers child dependents
    • Self-only employee contribution = $100/ month
  • Plan B (Minimum Essential Coverage) -- covers child dependents
    • Self-only employee contribution = $80/ month

The company would select Plan B and use the $80/ month self-only employee contribution amount against an employee’s income to determine the affordability of the plan. This is because this company does not offer any Minimum Value Coverage plans, so Minimum Essential Coverage is the highest level of coverage of all plans that cover child dependents, and Plan B is the cheaper of the two Minimum Essential Coverage plans.

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