If you’re an employer, here’s what you need to know about complying with the Affordable Care Act (ACA; popularly known as Obamacare). The Tax Cuts and Jobs Act, passed in December 2017, did not repeal the ACA—only the individual mandate, starting in 2019. Although court challenges to the ACA continue, the ACA employer mandate remains in effect.
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 9.86% 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 2018 will be a large employer subject to the mandate in 2019. 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.
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 do so, a no-coverage penalty is imposed by the IRS, provided at least one full-time employee receives a premium tax credit for enrolling in health insurance through a state health insurance exchange. The amount of the no-coverage penalty is $2,500 ($208.33 per month) times the total number of full-time employees minus the first 30 full-time employees. 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. The no-coverage penalty is an excise tax and is not tax deductible, unlike contributions an employer makes for its employees’ health insurance coverage.
Avoiding the No-Coverage Penalty
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 no-coverage penalty, 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:
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.