What are Employers' Healthcare Insurance Requirements Under the Affordable Care Act?

Learn what the Affordable Care Act (ACA) means for large and small employers.

By , J.D. | Updated by Aaron Hotfelder, J.D., University of Missouri School of Law

If you're an employer, here's what you need to know about complying with the Affordable Care Act (ACA, also called Obamacare).

The Employer Mandate for Large Employers

The ACA employer mandate requires "large employers" to provide a specified percentage of their full-time equivalent employees and those employees' families with minimum essential healthcare insurance. This insurance must pay for at least 60% of covered services. Employers can require that employees contribute toward their insurance coverage, but they can't require them to pay more than 9.83% of their household income toward it. Large employers who fail to comply with the coverage mandate must pay a no-coverage penalty to the IRS.

Definition of Large Employer

The crucial question for a hiring firm is whether it is a "large employer." A large employer is any organization that employs, on average, a combination of 50 or more full-time and "full-time equivalent" (FTE) employees during six months or more of the previous year. Thus, for example, any employer with 50 or more employees in 2021 will be a large employer subject to the mandate in 2022. Determining how many full-time and FTE employees you have can be complex. For details, see the IRS webpage Determining if an Employer is an Applicable Large Employer.

ACA Penalties

Large employers (those with 50 or more full-time and/or FTE employees) must provide adequate coverage to at least 95% of their employees and dependents. If a large employer fails to provide coverage to 95% of its employees, it is required to pay a penalty of $2,700 per full-time employee, minus the first 30 employees. If an employer provides coverage to 95% of employees, but it doesn't meet the ACA's minimum requirements, it must pay the lesser of: (1) $4,060 per full-time employee receiving a federal subsidy for coverage purchased on an ACA exchange, or (2) $2,700 per full-time employee minus the first 30. The same penalty is due if an employer doesn't provide affordable coverage.

No penalty is due for failure to offer coverage to part-time employees. For an employer that offers coverage for some months but not others during the year, the payment is computed separately for each month for which coverage was not offered. These penalties are an excise tax and are not tax deductible, unlike contributions an employer makes for its employees' health insurance coverage.

Avoiding the Penalties

Because (1) no penalty is due for failure to provide coverage to part-time employees, and (2) a business's first 30 full-time employees don't count toward the penalties, a business that doesn't provide health insurance coverage will not be subject to the penalty if it had 30 or fewer full-time employees during the prior year, regardless of how many FTE employees it had that year. Because of this loophole, some businesses have reduced their number of full-time employees to 30 or fewer. Under the ACA, a full-time employee must work 30 or more hours per week. So some employers have cut their employees' hours to less than 30 per week so they won't be counted as full-time employees for ACA purposes for any future year.

For more details on large employers' duties under the ACA, refer to the IRS Affordable Care Act Tax Provisions for Employers webpage.

Small Employers and the Health Care Tax Credit

Small employers—those with less than 50 full-time equivalent employees—are not subject to the employer mandate. Thus, they need not provide their employees with health insurance coverage. However, small employers who do provide their employees with health insurance may qualify for the Small Business Health Care Tax Credit. This credit is equal to 50% of the premiums small employers pay for their employees' health insurance. For example, if you pay $20,000 for employee health insurance, you'll be entitled to a whopping $10,000 tax credit. The tax credit is available to eligible employers for two consecutive tax years.

To qualify for the credit, you must:

  • have no more than 25 full-time equivalent employees (your relatives don't count)
  • pay your employees average annual full-time wages of no more than $55,000
  • pay at least 50% of the annual premiums for your employees' health insurance
  • offer coverage to every full-time employee, and
  • purchase your employees' health insurance through a Small Business Health Options Program (SHOP) Marketplace, a health insurance exchange specifically designed for businesses with 50 or fewer full-time employees.

If you have questions about whether you're eligible for the Small Business Health Care Tax Credit, refer to the IRS's Small Business Health Care Tax Credit and the SHOP Marketplace webpage.

IRS Information Reporting by Large Employers

Large employers (those with 50 or more full-time equivalent employees) must file an annual information return with the IRS to report data about the health care coverage, if any, they offered to full-time employees. The IRS uses this information to administer the employer shared responsibility provisions and the premium tax credit.

These employers must file IRS Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1094-C Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, with the IRS by February 28 each year (March 31 if filed electronically). This is the same filing deadline as for other information returns commonly filed by employers, such as Forms W-2 and 1099. Employers must provide a copy of Form 1095-C to their employees by January 31 each year. For more details, refer to the IRS's Information Reporting by Applicable Large Employers webpage.

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