Everything You Need to Know About Employer Shared Responsibility Enforcement

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According to statistics, 45% of Americans are inadequately insured for health coverage. At the same time, research states that a quarter of Americans report having a pre-existing health condition. 

Tax Law employer mandate

To counteract this, the Affordable Care Act (ACA), put in place an employer mandate requiring employers to provide a minimum level of ACA-approved coverage.

If you are an employer, and you do not know about the employer’s health care shared responsibility provisions of the ACA, it is essential that you find out what is the employer mandate, and what’s are its requirements. 

The employer mandate is becoming increasingly enforced by the IRS, and non-compliance can result in steep fees. Not all businesses are required to abide by the mandate. However, no matter the size of your business, it is important that you understand its requirements and stipulations.

Otherwise, you might be in for a nasty surprise and a very unexpected tax bill. 

To help you avoid this, we have created this guide which will walk you through who is required to follow the ACA mandate, and how to do so. We highly advise you to read on and get savvy about employer-shared responsibility. 

What Is the Employer Mandate?

As mentioned above, the Affordable Health Care Act’s employer mandate requires that certain businesses provide health care for their employees. 

The mandate is enforced by the IRS, who keeps tabs on how many employees companies have and what health coverage they take out. 

Companies who are required to provide health coverage plans to employees, and who fail to do so, can be assessed a shared responsibility payment by the IRS. 

The shared responsibility payment is also known (unofficially) as the ‘pay or play’ penalty. 

Let’s take a look at which companies are required to meet the Affordable Care Act’s shared employer responsibility mandate. 

Who Is Liable for Employer Shared Responsibility?

According to the act, only large employers are required to adhere to the health coverage mandate. The ACA defines a large employer as an organization with more than 50 full-time employees or full-time employee equivalents.

These types of companies are termed as ‘applicable large employers’, or ALEs for short. 

In addition, smaller companies that belong to an aggregate group may also be considered to be part of an ALE. If so, they are thereby required to meet the ACA’s requirements for larger employers. 

Aggregate companies can take on a number of forms. These include:

  • Brother/sister companies
  • Parent companies
  • Any company whose main source of income is derived from managing or owning another company or companies

If yours is a smaller business, with fewer than 50 full-time or full-time equivalent employees—you do not fall under the mandate. This means that the choice of whether or nor to provider employer-based health coverage is yours, and there are no legal repercussions for not doing so. 

What Are the Requirements for Meeting the ACA Employer Mandate?

In order to comply with the ACA employer mandate, ALEs are required to offer health cover to 95% of full-time employees and full-time equivalents. 

Additionally, the health cover needs to meet certain minimum requirements—such as coverage requirements and affordability requirements—in order to qualify.

If ALEs choose not to provide health coverage to employees, they are then required to make shared responsibility payments in place of coverage. This system, although not technically termed as a penalty system, takes the form of IRS fees for employers who omit to provide health care. 

Along with these requirements, employers are also responsible for issuing and filing the necessary IRS forms that pertain to employees and health coverage. 

How Shared Responsibility Payments Work

As per the ACA’s employer shared responsibility provisions, ALEs are required to either offer health coverage that meets certain criteria of affordability and coverage or pay annual shared responsibility payments to the IRS. 

Although this shared payment is often referred to as a penalty, the IRS defines it as a required payment that ALEs must make if they choose not to provide coverage for their employees. 

How Much Are Shared Responsibility Payments?

The shared responsibility payments are calculated by the IRS and amount to $2,570 per annum per employee (minus up to 30 employees). 

This payment/penalty is triggered if an employee purchases health coverage on the Health Insurance Marketplace with premium tax credits. 

Other Penalties

In addition to shared responsibility payments, there is another penalty that employers can incur. This happens if the employer is an ALE and they are not supplying adequate cover to their employees. 

If an ALE does not offer health coverage that meets the affordability and coverage requirements, they could be charged a nondeductible $3,860 annual penalty. This penalty is triggered if an employee seeks out medical coverage on the Health Insurance Marketplace with premium tax credits.

If this occurs, and the ALE’s coverage does not meet requirements, then the penalty is levied per employee who purchases coverage. For example, if 10 employees purchase coverage with premium tax credits, the penalty to the ALE would be $3,860 x 10 = $38,600. 

The ACA Standards for Health Coverage

Now that we know what the ACA mandate is, who it applies to, and what the penalties are—let’s take a closer look at the ACA standards for employers to be compliant in coverage offerings. 

Minimum Coverage Requirements

In order for an employee’s health coverage program to quality with the ACA requirements, it needs to provide minimum coverage for employees. This is also known as a ‘minimum value’.

Minimum coverage needs to offer substantial coverage of physician and inpatient hospital services. It also needs to extend to dependants, and be designed to pay 60% or more of an employee’s health care costs. The remainder is expected to be paid by employees through copays and deductibles. 

For purposes of the ACA provisions for employer-shared responsibility, dependants are children under the age of 26. Spouses, step-children, and foster children do not qualify as dependants. 

Affordability Requirements

The ACA also requires that employer health coverage meets certain affordability requirements. 

According to the act, an employer can not charge more than a certain amount for self-coverage. This can’t be more than 9.78% of an employee’s rate of pay, 9.78% of an employee’s wages in box 1 of Form W-2, or 9.78% of the federal poverty level.

Take note that these requirements only apply to self-coverage. For other levels of coverage, such as family coverage, employers are not limited on what they can charge. 

How to Get Compliant

Is your organization is bordering on being an ALE, is an ALE, or part of an aggregate group? If so, you need to ascertain whether or not you need to get compliant with the ACA mandate, and how to go about this. 

Calculate Whether Your Company Is an ALE

The first thing to do is to figure out whether your company is an ALE. 

If your organization employs more than 50 full-time of full-time equivalent employees, then it will fall as an ALE. 

Full-time employees are defined for purposes of the ACA mandate as being those who work more than 30 hours per week. Employees who work less than 30 hours per week are considered part employees. However, these numbers will also determine the amount of part-time equivalent employees. 

To work out how many full-time employees a company has, it is necessary that you evaluate the previous calendar year’s records. From there, you can determine the total amount of full-time employees. 

For part-time employees, it is required that employers add the total hours worked by part-time employees together and then divide this by 120 to determine the number of full-time equivalent employees. 

If your company is part of an aggregate, then you will also need to take into account the number of full-time employees and full-time equivalents there are in the parent company or/and brother and system groups. To accurately calculate this it is often advised that you seek out professional tax consulting services

Make Sure That Your Company’s Health Coverage Meets Requirements

To check whether a company’s coverage is ACA-compliant, companies can review their Summary of Benefits and Coverage documents. Companies can also ask their insurance carrier. 

To comply with the requirements of Form 1095-C every ALE needs to have documents that support their plan’s minimum value of coverage. 

Ensure That Your Company Is Meeting Its Reporting Obligations

If your company is an ALE it will also need to meet specific reporting and administrative requirements from the IRS. 

The main forms which ALEs need to complete and file or issue are:

  • Form 1095-B
  • Form 1094-C
  • Form 1095-C

Let’s take a look at the role of these forms.

1095B forms need to be delivered by insurance carriers to all employees that are fully insured. Employers must also file these forms with the IRS. Any non-ALEs who offer self-insured health plans are also required to issue and submit 1095-B forms. 

Additionally, ALEs are required to fill out and file Form 1094-C and Form 1095-C to report whether or not they have an ACA compliant health coverage plan available for full-time employees. 

Form 1094-C is only filed with the IRS and is not distributed to employees. 

Form 1095-C must be filed and distributed to all employees who were full-time workers for any month during the calendar year. 

Payment of Penalties

If a full-time employee of an ALE buys health coverage through the marketplace and reports a premium tax credit on their income tax return, this will trigger a shared responsibility payment on the part of the employer. 

The employer is required to calculate the payment. The IRS will issue Letter 226J detailing the payment/penalty. The IRS will also give employers a period of 30 days to respond before they demand payment of the tax liability. 

Employers then have the option of making the payment or communicating to the IRS reasons why the penalty is in error. If the IRS does not accept this, or the employer is not happy with any amendments, employers can request a pre-assessment conference with the IRS Office of Appeals.

After this point, the IRS will issue a notice and demand for payment, if payment is due. 

ALEs who do offer ACA compliant coverage can reduce the likelihood of this process by ensuring that Forms 1095-C and 1094-C and accurately filed, and by communicating thoroughly with the Health Insurance Marketplace. 

Contesting Health Insurance Marketplace Notices

For ALEs who do provide ACA-compliant cover to their employees, it is important to respond and contest any Health Insurance Marketplace notices. 

These notices are triggered when an employee applies for health coverage through the marketplace. If the employee indicates that they do not receive ACA-compliant health coverage by their employer, the employer will receive a notice stating that the employee is eligible for premium tax credits for health insurance and that the employer could be faced with a penalty for not offering coverage to their employees.  

If this occurs, the employer has the right to appeal this with the Health Insurance Marketplace by following the direction on the notice. Employers have 90 days to respond and provide evidence if they do in fact provide compliant health coverage to employees. 

After this point, an appeal judge may request a hearing in some cases, or further proof and documentation. 

By communicating promptly and thoroughly with the Health Insurance Marketplace, employers can lessen the chance of having to undergo appeals processes with the IRS. 

Do You Need Help Complying With the Employer Mandate?

Now that you know the answer to the question—what is the employer mandate?—you will need to determine whether or not your organization is an ALE, and if so, whether or not it is providing ACA-compliant coverage. 

Figuring out whether a company is an ALE can be complicated, especially in the case of aggregate companies. If you are unsure of your company’s standing, then it is best to seek out the advice of a tax professional

If you already find yourself deep in a collection process from the IRS and need assistance appealing it, we offer emergency tax services.

For any questions or additional information, please feel free to contact us and we will be happy to help. 

Managing Partner of Silver Tax Group, author of the book “Stop the IRS”. Practicing a variety of tax issues, regulations, laws and rights. Specializing exclusively on tax matters involving IRS audits, negotiation, settlements & compromises.

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