Understanding the Employer Shared Responsibility Rules

Two women discussing taxes and IRS reporting with paperwork

The Affordable Care Act requires applicable large employers (ALEs) to offer affordable, minimum-value health coverage to their full-time employees or pay a penalty. This provision is also known as the “employer shared responsibility” or “pay or play” mandate. ALEs need to understand how this mandate works to avoid costly penalties and ensure compliance with the ACA.

Determining if an ALE is liable for a pay or play penalty

An ALE is only liable for a pay or play penalty if one or more of its full-time employees receive a subsidy for coverage under an ACA exchange. If the health coverage offered by an ALE meets certain requirements, then it will be considered affordable and compliant with the pay or play rules.

Specifically, under the pay or play rules, an ALE’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5% (as adjusted) of the employee’s household income for the taxable year. For plan years beginning in 2023, this affordability percentage decreases to 9.12%.

Calculating and reporting penalties

If an ALE has at least one full-time employee who receives a premium tax credit through an exchange, then it will be subject to certain penalties under the pay or play rules. For example, if an ALE fails to offer minimum essential coverage that is both affordable and provides minimum value, then it will owe a penalty. In addition to owing potential penalties, ALEs must also report information concerning their offers of health coverage to their full-time employees on Form 1094-C/Form 1095-C each year. The failure to file these forms can result in additional Internal Revenue Service penalties.

Because employers may not always know the household income of their employees, the IRS has established three optional safe harbors they can use to confirm if their healthcare benefits can be considered affordable. The Form W-2 safe harbor, rate of pay safe harbor and federal poverty level safe harbor are all tools ALEs may rely on to make sure they comply with the ACA's pay or play rules.

This ACA Compliance Overview outlines these affordable care determinations and how ALEs can use the safe harbors to meet these requirements.

For more information about employee benefits, our services and products, contact HANYS Benefit Services online or call 800.388.1963.

This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. Design ©2020, 2023 Zywave, Inc. All rights reserved.

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