The Affordable Care Act (ACA) employer mandate legally requires employers with 50 or more full-time equivalent (FTE) employees to offer health insurance that meets minimum value requirements to at least 95% of their full-time employees and dependants.
Also known as “Obamacare” or the Patient Protection Act, the Affordable Care Act aims to provide dependable and affordable health coverage to U.S. citizens. The act primarily approaches this goal by offering tax credits to people who purchase insurance through government marketplaces and by requiring certain employers to provide coverage to their employees.
If you’re an employer, it’s critical that you understand the ACA rules and regulations. Failure to comply can lead to significant penalties of several thousands of dollars per employee. To get help now, contact us at Wiggam Law today.
Understanding the Employer Mandate
The ACA applies to all employers, but only Applicable Large Employers (ALE) are subject to two provisions:
1) Employer shared responsibility provisions
2) Employer information reporting provisions for offers of minimum essential coverage
For small employers, the act offers tax credits for helping employees obtain health insurance. Additionally, under the ACA, all employers who offer health coverage to employees must file annual returns about their offerings. Finally, ALEs must meet certain coverage requirements or pay a shared responsibility plan, and they must file required forms or else face stiff penalties.
What is an Applicable Large Employer (ALE)?
An ALE is defined as a business that has 50 or more full-time and/or full-time equivalent (FTE) employees during the preceding calendar year. A full-time employee is any employee who has either worked an average of 30 or more hours a week or 130 hours a month.
To calculate your full-time equivalent employees, divide the number of part-time hours worked in a month by 120. Then, round down to your FTE number. For example, say that your business has five part-time employees working 120 hours per month. When you divide this number by 120, you get 1, which is your number of full-time equivalent employees.
To give you another example, say that you have 40 full-time employees and 25 part-time employees. Your part-time employees work a total of 1500 hours per month. When you divide this number by 120, you get 12.5. When you round down that number and add it to your 40 full-time employees, you get 52, meaning that you qualify as an ALE.
Health Coverage Requirements
Under the Affordable Care Act, ALEs have to provide health insurance to at least 95% of their full-time employees, including their dependents. Any child who is under the age of 26 is considered a dependent. The coverage that they offer must qualify as minimum essential coverage (MEC), and it must be affordable to their employees.
If a business does not offer health coverage, it may be required to pay an employer-shared responsibility payment to the IRS. A business can also incur a shared responsibility penalty if the company doesn’t offer coverage that is affordable enough to employees. These penalties are calculated differently, as explained below.
Affordable vs. Minimum Value
The terms “minimum value” and “affordability” mean different things according to the employer shared responsibility provisions. Minimum value means that the health insurance covers at least 60% of the total cost of benefits. Affordability refers to whether or not the coverage is affordable, and ALEs can use various tax documents, like W-2 wages, to determine the “affordability” of the health insurance plan relative to the income of their employees.
Employer Mandate Penalties Explained
There are two penalties for ALEs that fail to offer coverage or don’t offer coverage that is affordable: the 4980H(a) penalty and the 4980H(b) penalty. The first penalty applies to ALEs that don’t offer coverage to at least 95% of their employees, and the second applies to ALEs that offer non-affordable coverage to at least 95% of employees.
- If an ALE does not offer health coverage (The “A” Penalty): If an ALE does not offer minimum essential coverage, it will be subject to the first type of employer shared responsibility payment. In this case, the ALE must pay $2,000 annually for each full-time employee minus the first thirty employees. Note that this penalty is indexed to inflation, and as of 2024, it is $2,970 per year.
- If an ALE fails to offer affordable coverage (The “B” Penalty): This penalty applies if an ALE offers essential coverage to at least 95 percent of its full-time employees, but at least one employee receives the premium tax credit. Then, the ALE will be subject to the second type of employer-shared responsibility payment, which is $3,000 per employee who receives the premium tax credit. Note that this number is indexed to inflation and is $4,460 per employee as of 2024.
Required Forms for the Affordable Care Act
ALEs are required to fill out both Form 1094-C and Form 1095-C. If they file an inaccurate form or do not file any forms at all, they may be subject to penalties or fines.
Form 1095-C
Form 1095-C (Employer-Provided Health Insurance Offer and Coverage) is used to gather information regarding healthcare insurance offered to individual employees. An ALE is required to fill out a 1095-C form for every full-time employee.
Employers must provide a copy to their employees and the IRS. The IRS uses these forms to track compliance. Employees use these forms when they file their individual income tax returns.
Forms 1094-C
Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) gathers a summary of the information reported on the company’s 1095-C forms. Businesses only need to generate one 1094-C form, and it should be filed with the IRS.
It is extremely important that you file forms 1094-C and 1095-C before the deadline. Forms 1095-C and 1094-C can be filed on or after the first of January. After that, employers generally have anywhere from the end of February to the beginning of April to file, depending on whether or not they are filing electronically. If a business is filing electronically, they have until April 1st or the following business day.
If you do not file or file incorrectly, there can be penalties up to $280. The IRS stacks these penalties, and you can incur one for not filing and one for not giving the form to your employees. For example, if you have 100 employees and you don’t generate any 1095-C forms, you can incur penalties of $560 each for a total of $56,000. If you provide these forms to your 100 employees but don’t send them to the IRS, you’ll incur penalties of $280 each for a total of $28,000.
How does the IRS use this information?
The IRS uses this information to determine whether or not businesses are compliant with ACA requirements. When individuals file their individual income tax return, they can use the information on their 1095 form to determine if they qualify for a Premium Tax Credit.
IRS Letter 226J: Notification of Potential Penalties
Letter 226J is sent to ALEs to notify them that they are in violation of the Affordable Care Act and may be liable to pay an Employer Shared Responsibility Payment. Included in the letter will be the amount that the IRS is proposing to assess.
What triggers the letter?
The IRS uses payroll tax returns and Forms 1094/1095 to determine if large employers are compliant with the ACA mandates. The agency also looks at Premium Tax Credits claimed on individual income tax returns to determine whether or not certain employers may face a shared responsibility payment for not providing coverage that is affordable enough. If the IRS believes that an employer should incur this penalty, they will send you this letter.
What Should I Do if I Receive IRS Letter 226J?
The first thing that you should do upon receiving IRS Letter 226J is read it carefully. It will detail how much you owe and why the IRS believes that your company is liable for an Employer Shared Responsibility Payment. Also, pay attention to any deadlines for protest or payment, which will also be listed in the letter.
If you disagree with the IRS and choose to refute the penalties, follow the steps outlined in the letter or contact a tax attorney for help. If you agree with the letter, you can continue by filling out the response form, IRS Form 14764, ESRP Response. If any of your employees claimed the PTC, you will also need to complete Form 14765, Employee Premium Tax Credit (PTC) Listing.
Why You Need to Understand the ACA (Affordable Care Act)
If an ALE is not in compliance with the Affordable Care Act, the business can incur some hefty penalties that only increase with the more employees a company has. To reduce your risk of penalties, pay close attention to the rules and make sure you understand whether or not you’re an applicable large employer.
To meet the ACA requirements, ensure that you offer healthcare coverage that is both affordable and at a minimum value. Review the rules regularly to ensure that you stay compliant, and if you cannot meet the requirements, be ready to face some stiff penalties. Additionally, ensure that you complete Forms 1094-C and 1095-C on time and provide them to employees and the IRS as required by the deadline.
Even if you don’t qualify as an ALE, you should understand the basics of the ACA if you’re an employer. That way, you won’t miss out on any credits for small employers, and if you eventually become an ALE, you’ll understand how to be compliant. Note that small employers who offer healthcare coverage may have to file Forms 1094-B and 1095-B.
ACA For Employers FAQs:
What qualifies an employer as an ALE under the ACA?
An applicable large employer (ALE) is a company or business that has at least 50 full-time and full-time equivalent employees.
How is the affordability of health coverage determined for ACA compliance?
Employers can assess affordability by looking at documents related to the wages of their employees, such as W-2s and other tax documents.
What are the consequences of failing to meet the ACA Employer Mandate?
The consequences of failing to meet the ACA Employer mandate are substantial penalties. If an ALE doesn’t offer coverage to at least 95% of its employees, it can incur penalties of $2,000 (indexed to inflation) per employee, with the first 30 employees being exempt. If an ALE offers coverage that isn’t affordable, it can incur penalties of $3,000 (indexed to inflation) per employee who claims the premium tax credit.
How can an employer respond to IRS Letter 226J?
You can respond to Letter 226J by completing the appropriate forms and carefully explaining to the IRS why you disagree with the proposed penalty. You should be prepared to provide proof that you are not subject to the penalty they are proposing. It can be complicated, and you should reach out to a tax attorney if you feel that the IRS has proposed the penalty against you in error.
What is the purpose of IRS Forms 1094-C and 1095-C in ACA compliance?
The purpose of IRS Forms 1094-C and 1095-C is to make sure ALEs remain compliant with the Affordable Care Act and to ensure that they provide their employees with affordable and reliable healthcare.
Get Employer Tax Help Now
Employers have a lot to navigate. In addition to dealing with ACA rules, you also have to deal with payroll taxes and all other employer responsibilities. The last thing an employer needs on their plate is dealing with tax penalties being assessed against them.
Want help making sure your company is compliant with all tax obligations? Then, reach out to the tax experts at Wiggam Law. Whether you manage 50 employees or 50,000, our team of experienced tax professionals can give you the advice and support you need.
To get help understanding the ins and outs of the Affordable Care Act or for help with any other business tax issues, schedule a consultation with us today to see how we can help you.