The Employer Shared Responsibility Penalty (ESRP), introduced by the Affordable Care Act (ACA), requires applicable large employers (ALEs) to offer affordable and minimum value health coverage to their full-time employees (and their dependents), or to potentially pay tax penalties to the IRS. Whether you are new to the ESRP or your company is newly subject to the ESRP, here are some of the key details.
An applicable large employer is an employer with 50 or more full-time and full-time-equivalent employees. For many employers, determining ALE status is obvious because they have well above or well below 50 employees. However, employers who have around 50 employees, are growing, or have large part-time or seasonal workforces should check their ALE status.
The IRS has a specific formula employers must use to check ALE status. Whether or not an employer is an ALE for a calendar year actually depends on how many employees they had in the prior calendar year. For information on the IRS formula, please read our article “Small employers: Check your ALE status for 2016.” If your company is a USI client, we can provide you with an ALE calculator that can assist your company in checking its ALE status.
The ESRP has two possible penalties which we call the “No Coverage Penalty” and the “Affordability Penalty.” The IRS calls them, respectively, the 4980H(a) and the 4980H(b) penalties. If an employer is subject to one of these penalties for a month, it will be subject to one or the other of the penalties but not both.
No Coverage Penalty
The No Coverage Penalty is the scarier of the two penalties and the one that employers will go to great lengths to avoid. The No Coverage Penalty applies if the employer fails to offer “minimum essential coverage” (MEC) to at least 95% of its full-time employees AND at least one of its full-time employees receives a tax subsidy for individual health insurance through a Health Insurance Marketplace. MEC includes comprehensive major medical coverage offered by employers but may not include limited benefit, indemnity-only, dental or vision plans.
The amount of the monthly No Coverage Penalty increases each calendar year. For 2021, the penalty per month is calculated as follows:
Monthly penalty = (Total number of full-time employees - 30) x $225.
The No Coverage Penalty is the scarier of the two penalties because it can add up fast to a large penalty. For example, assume an employer has 75 full-time employees. If it does not offer at least 95% of those employees coverage, it could be subject to a No Coverage Penalty of $10,125 per month, and possibly up to $121,500 for the year!
The Affordability Penalty may apply if the employer offers MEC to at least 95% of its full-time employees, but the MEC does not offer minimum value and/or is unaffordable. It would also apply to any of the full-time employees (up to 5%) who were not offered MEC.
The amount of the Affordability Penalty increases each calendar year. For 2021, the penalty is calculated as follows:
Monthly penalty = $338.33 x number of full-time employees that receive a tax subsidy for individual health insurance through a Health Insurance Marketplace.
The Affordability Penalty typically will be less than the No Coverage Penalty because it is calculated only on employees that receive tax subsidies, which tends to be very few.
For example, assume an employer offers MEC to 95% of its employees, but the MEC is not affordable for 20 of its employees. If two of those employees obtain a tax subsidy for individual health insurance through a Health Insurance Marketplace, the employer would be subject to an Affordability Penalty of $676.66 per month, and possibly up to $8,119.92 for the year.
To offer coverage to a full-time employee, the employer should give the employee an annual choice to enroll and disenroll (e.g., through open enrollment). In addition, the employer must offer coverage that includes coverage for the employee’s children. The employer may, but is not required to, contribute towards the cost of the children's coverage.
For 2021, coverage for an employee is affordable if the employee’s cost of coverage (i.e. premiums) for single coverage on the cheapest plan available to the employee is 9.83% or less of the employee’s household income. The specific calculation changes from year to year. Because employers don’t know employees’ household incomes, the IRS allows ALEs to adopt one of three affordability “safe harbors” — the W-2 Safe Harbor, the Rate of Pay Safe Harbor, and the Federal Poverty Level Safe Harbor. For more information about these safe harbors, please see our ACA Reporting Tip #17.
A plan has minimum value if, on average, it pays at least 60% of the total allowed cost of benefits. This is an actuarial calculation. Most employer-provided plans provide minimum value. However, plans with limited benefits or large out-of-pocket costs should be tested to make sure they offer minimum value.
The deceptively simple-sounding definition of a full-time employee for the ESRP is an employee who is employed for an average of at least 30 hours of service per week with an employer. The reality is not so simple, however, because the IRS has special rules for computing averages and a special definition of “hours of service.”
The IRS allows employers to use either a “monthly measurement method” or a “lookback measurement method” for calculating the average hours of service per week. The lookback measurement method usually is more advantageous for employers, but it is difficult to apply because it applies differently to different types of employees (e.g., new hires, ongoing employees, seasonal employees, etc.).
The rules are so complex that many employers contract with their payroll provider or a third-party vendor to help with determinations.
Note that these two measurement methods are the only approved methods for determining full-time status for ESRP purposes. Just because you label an employee “full-time” for other purposes, e.g. based on their work schedule, does not mean they are full-time for ESRP purposes. It is essential for ALEs to know who their full-time employees are, because the penalty calculations depend upon it. Also, as discussed below, ALEs have to file special IRS reports for their full-time employees.
The IRS requires ALEs to annually self-report their offers of coverage to full-time employees by using special tax forms called the Form 1094C and Form 1095C (refer to USI’s Compliance Update addressing the updated forms released for 2020). The IRS uses information from these forms to determine which employers might owe a No Coverage Penalty or Affordability Penalty
If the information submitted on these forms is wrong, the penalty exposure is significant. So, it is important for employers to get it right when it comes to reporting. Most employers use their payroll provider or a third-party vendor to assist with their reporting. Hiring a vendor to help with reporting is not a “get out of jail free” card however, since vendors rely on the information provided to them by employers. If an employer provides incorrect information, the employer’s forms could end up incorrect too.
Please refer to our ACA reporting tip sheets archive or contact us for additional guidance.
Sarah provides employer-focused guidance on human resource matters. With an emphasis on employee benefits and the Affordable Care Act, she distils the complexity of employment laws into understandable action items that meet a client’s business goals.
Sarah provides employer-focused guidance on human resource matters. With an emphasis on employee benefits and the Affordable Care Act, she distils the complexity of employment laws into understandable action items that meet a client’s business goals. During previous private practice experience, Sarah handled numerous complex benefit matters, including the transition of benefit plans in large corporate acquisitions, de-risking solutions in pension plans, contested health plan claims, DOL and IRS audits and the implementation of ACA-compliant health plan solutions. Sarah graduated from University of Wisconsin Law School, with a Bachelor of Arts degree from Grinnell College.
When the public exchanges opened in October 2013, the technical glitches and low enrollment were well publicized. Since then, both public and private exchanges have evolved significantly. The private alternatives that have entered the scene often have more advantages than their public counterparts.
Public health insurance exchanges have a head start over private exchanges, but in the coming years, employer and employee awareness will increase, and soon the private options should receive the recognition and utilization they deserve.
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