Understanding the Employer Mandate in Healthcare Reform

Employers who don't provide comprehensive, affordable healthcare must pay a penalty.

The Patient Protection and Affordable Care Act (PPACA, also known as the Affordable Care Act, health care reform, or simply Obamacare) has many moving parts.

One provision that initially received significant attention was the individual mandate, which required everyone to purchase health insurance (with financial assistance from the government, if needed) or pay a penalty. In late 2017, Congress passed the Tax Cuts and Jobs Act, which eliminated the penalty for failing to buy health insurance starting in 2019.

The PPACA also contains a mandate for employers, sometimes called the “play or pay” requirement, that the Tax Cuts and Jobs Act didn't affect. The mandate applies to employers with at least 50 employees, who must provide affordable health care benefits that meet certain minimum coverage requirements or pay a penalty. Whether and how the mandate applies depends on the size of the employer, the coverage it offers, and the cost of that coverage.

The law also includes a number of requirements for health insurance plans, including coverage of preventive care, preexisting conditions, and adult children; restrictions on lifetime and annual coverage limits; and more. Unless employers are self-insured, their benefit providers will handle many of these requirements.

Which Employers Are Subject to the Mandate?

Employers are covered by the play or pay mandate if they have at least 50 full-time or full-time equivalent employees. Independent contractors are not included in the count.

Any employee who works at least 30 hours per week is considered full time. To come up with a figure for full-time equivalent (FTE) employees, the employer must add up all of the hours worked in a month by employees who work less than 30 hours per week, then divide the total by 120. For example, if an employer had two employees who each worked 15 hours a week, and the month consisted of four work weeks, those two part-time employees would add up to one FTE employee.

To find out whether they will be subject to the mandate, employers must:

  • calculate their full-time and FTE employees for each month of the prior year
  • divide that total by 12, and
  • round the total down to the nearest whole number.

That final answer represents the average number of full-time and FTE employees the employer had per month. If the total is 50 or more, the employer is subject to the mandate. If the total is 49 or less, the employer can disregard the mandate.

How Insurance Coverage Affects the Mandate

The play or pay mandate requires employers to either provide health insurance coverage that meets certain requirements or pay a penalty. A covered employer that doesn’t provide health insurance benefits is subject to the penalty. But even an employer that provides benefits might have to pay, if the coverage doesn’t meet minimum standards.

Failure to Provide Benefits

An employer that doesn’t provide health insurance coverage to virtually all (at least 95%) of its full-time employees is subject to the penalty if even one of its employees received a subsidy or tax credit to purchase insurance. Note that even though FTE employees are counted toward an employer’s total for purposes of determining whether the employer is covered, only employees who work at least 30 hours a week are “full-time” employees entitled to coverage.

The employer must also make coverage available to certain dependents of full-time employees: children (including biological, adopted, step-children, and foster children) who have not yet reached the age of 26. An employer need not offer coverage to the employee’s spouse or other dependents.

Minimum Essential Coverage

A plan qualifies as adequate if it meets the coverage requirements of the PPACA and it pays for at least 60% of covered health care expenses allowed by the plan. If an employer offers coverage that doesn’t meet this requirement, and any employee buys coverage through a health insurance exchange and receives a tax credit or other government assistance, the employer must pay a penalty.

Affordability Requirement

The employer may also have to pay a penalty if the coverage it offers isn’t affordable. Any employee who has to pay more than 9.86% of his or her family income for coverage may instead buy coverage through a health insurance exchange and receive a tax credit. If any employee does so, the employer will be subject to a penalty.

The 9.5% figure is calculated as the employee’s share of the least expensive option for self-only coverage. In other words, if an employee opts for more expensive coverage or dependent coverage, the employer won’t be liable if there was a self-only option available that would have come in under the limit.

How Much Does the Employer Have to Pay?

There are two potential penalties an employer might have to pay, depending on whether the employer failed to offer insurance at all or failed to offer affordable insurance that provided minimal essential coverage.

No Insurance Offered

An employer that doesn’t provide benefits must pay $2,500 (for 2019) per full-time employee per year. However, the first 30 full-time employees are “free”: The penalty kicks in at employee number 31. So, an employer with 60 full-time employees would owe a penalty of $75,000 per year (30 employees times $2,500 each).

Unaffordable or Insufficient Insurance

An employer that provides unaffordable benefits or benefits that don’t meet the minimum coverage requirements must pay $3,750 (for 2019) for each employee who is eligible for a tax credit for purchasing insurance through a health insurance exchange. An employer cannot be required to pay more than it would have been charged for failing to offer insurance in the first place. In other words, the penalty is capped at $2,500 times the number of full-time employees minus 30.

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