The complexity of the Affordable Care Act (ACA) can make adhering to all mandates seem an impossible task.
With numerous penalties in place for ACA compliance violations, the stakes of doing this job correctly couldn’t be higher.
If you find yourself in this role, you are probably feeling the pressure of complying with multiple mandates and potentially facing costly penalties for ACA violations you may not be familiar with, and the financial aftermath of both
At Combined, a HUB International company, our ACA and benefits specialists have helped countless employers understand and comply with ACA requirements and avoid the hefty cost of ACA penalties.
We want you to fully understand the ACA requirements that apply to your company and group health plans, the cost of remaining in compliance, and the best way to avoid ACA penalties from becoming a business expense.
By reading this article, you will learn everything you need to know about complying with the ACA Employer Shared Responsibility requirements and successfully avoiding penalties.
What are the ACA Employer Shared Responsibility Provisions (ESRP)?
The ACA stipulates that all Applicable Large Employers (ALE), employers with 50 full-time and full-time equivalent employers in the prior calendar year, must provide:
- Minimum Essential Coverage (MEC) to at least 95% of their full-time employees
- The MEC offered must meet the ACA affordability and minimum value standards
Only employers that are ALEs are responsible for complying withthese ACA offer of coverage and cost requirements.
So, the first question to ask is:
How do I know if I am an ALE?
Who is an ALE under the ACA?
The ACA defines an ALE as an employer that employed an average of 50 full-time and full-time equivalent (FTE) employees during the previous calendar year, based on IRS controlled group rules.
The ACA defines a full-time (FT) employee for the purpose of the ALE determination, as an employee who works 120 hours in a month. A Full-time equivalent employee (FTE) is an employee who works less than 120 hours in a month. To assess how many FTE employees you employed in a month, add the hours of all employees on payroll that worked less than 120 hours in a month and divide it by 120. The result is the number of FTE employees you employed in that month. Add the FTE employees to the FT employee count for each month in a calendar year, and divide by 12. The outcome is the number of FT and FTE employees you employed in a calendar year.
If the number of FT and FTE employees is at or greater than 50, you are deemed to be an ALE for the subsequent calendar year.Remember, that the ACA requires that you also take into account the FT and FTE employees employed by a sister or parent company (affiliated entities) in assessing how many employees you employ. Even if you employ only 15 FT and FTE employees but your parent company employs 100 FT and FTE employees, you are deemed to be an ALE as in aggregate you and your parent company employ more than 50 FT and FTE employees. As an ALE under the ACA, you are required to offer minimum essential coverage to at least 95% of your full-time employees, and that coverage must also be adequate.
So, the next question to ask is:
What is adequate coverage?
What is adequate health coverage under the ACA?
The ACA defines adequate coverage as an employer-sponsored MEC plan that is both affordable and minimum value.
What qualifies as affordable health care coverage?
To meet the ACA standard for affordability, an employee’s contribution for employee only coverage that is minimum value, cannot exceed a percentage of the employee’s wages (rate of pay, box 1 of W-2 wages or 100% of the federal poverty level). Note that the maximum contribution percentage amount is set by the IRS and the threshold fluctuates from one year to the next. Therefore, you must reassess on an annual basis, if your employee contributions for coverage meet the affordability requirements of the ACA. For 2025, the maximum employee contribution is 9.02% compared to 8.39% in 2024, which allows employer’s to charge employees more for employee only coverage in 2025 than in 2024. Employers are required to apply the new affordability percentage as of the first day of their plan year for which the new affordability percentage applies.
For coverage to be considered affordable, the lowest cost plan you offer to full-time employees that is minimum value, cannot require an employee to pay for employee only coverage an amount greater than applicable percentage for the year.
What qualifies as minimum value health care coverage?
To meet the ACA standard for minimum value, the medical plan you offer must cover at least 60% of the average total covered benefits which must include hospitalization, outpatient surgery, physician services and pharmacy benefits.
This means that if an employee receives medical attention, for coverage to be considered minimum value, their health care plan must pay 60% of the total cost.
4 costly ACA compliance penalties
You are probably asking one last and very important question:
Why does it matter?
Understanding and following ACA requirements matters because the high cost of failing to comply can be financially crippling to an employer. The IRS will impose penalties on employers who fail to comply with the Employer Shared Responsibility Provisions (ESRP) of the ACA. These penalties are excise taxes, not covered by insurance or eligible to be deducted as a business expense.
As we look at 4 major ACA noncompliance penalties, you will see just how expensive ACA noncompliance can be.
ESRP Noncompliance Penalty #1 – Violation of IRC Section 4980H(a)
The first requirement under the ACA is that all ALEs must offer MEC to at least 95% of their full-time employees for every month in a calendar year.
ALEs are required to report to the IRS on an annual basis (file Forms 1094/1095-C) whether they offered coverage to their FT employees or not and if they offered coverage to at least 95% of their FT employees (Form 1094-C Section III).
The IRS will assess penalties under ESRP IRC 4980H(a) if:
1. An ALE reports that they did not offer coverage to 95% of their FT employees, and
2. At least one FT employee who was not offered coverage, received premium tax credits from an exchange or marketplace during the month or months the employer failed to offer coverage to 95% of their full-time employees.
Once the IRC §4980H(a) penalty has been assessed for one or more months in a calendar year, the ESRP is calculated as follows:
The ESRP amount owed for each month coverage was not offered for 2024 would be:
($241.66)X (Total # of full-time employees – 30 employees) = Monthly ESRP penalty.
Note: The minus 30 employees is prorated if the employer is a member of a controlled group of corporation (employer has a sister and/or parent company).
The IRS total ESRP penalty will be the monthly penalty multiplied by the number of months coverage was not offered to 95% of FT employees in a calendar year.
For Example: If you employ 100 full-time employees and do not offer coverage to them during 6 months of the year (your FT employee count is the same for all six months), you would be subject to an ESRP of $103,950.
($247.50) X (100 full-time employees – 30= 70) = $17,325 per month X 6 months= $103,950
ESRP Noncompliance Penalty #2 – Violation of IRC Section 4980H(b)
The second requirement under the ACA is that ALEs offer to FT employees MEC that is both affordable and minimum value.
ALEs are also required to report to the IRS detailed information on the type coverage offered and the monthly cost of employee only coverage offered to FT employees. This information is reported in Form 1095-C (Part II).
If the coverage reported on Form 1095-C does not meet ACA standards for affordability and minimum value, the IRS will assess a IRC 4980H(b) penalty for each employee who was offered inadequate coverage and as a result, the employee enrolled in subsidized exchange or marketplace coverage.
The ESRP IRC 4980H(b) penalty is calculated on a monthly basis as described below:
($371.67) X (# of employees who were offered inadequate coverage and received a PTC from an exchange/marketplace).
The annual ESRP IRC 4980H(b) penalty will be the sum of months for which coverage was inadequate. Note that the penalty amount may vary by month as the penalty is based on the number of employees who received a PTC from an exchange or marketplace, and that number can change if employment terminates.
For Example: If you employ 100 full-time employees and offer them all coverage, but medicalcoverage for 20 of your employees is either not affordable or not minimum value for 6 months of the year, you would be subject to an ESRP penalty of $44,600.40.
($371.67) X (20 employees with inadequate coverage who received PTC from an exchange) = $7,433.33 per month
Note: The maximum ESRP penalty for violation ofIRC4980H (b) cannot exceed the ESRP penalty for violation of IRC4980H (a) (failure to offer coverage to 95% of FT employees)
Noncompliance Penalty #3 – Failure to file with the IRS Forms1094/1095 B or C
The ACA requires that all ALEs report to the IRS on an annual basis offers of coverage and other health care information by March 31st of each year. The IRS uses the information captured in the Forms 1094/1095 B or C to enforce the ACA ESRP mandate.
The third penalty, under IRC Section 6721, is for failure to file returns – this penalty governs incorrect filing, late filing, and intentional disregard of filing requirements.
Noncompliance Penalty #4 – Failure to furnish copies of Forms 1095-B/C to covered employees and participants
The ACA requires that all ALEs and non-ALEs that sponsor a self-insured or level funded medical plan (including MEC plans) report coverage offers to the IRS must provide a copy of Form 1095-C/B to all eligible employees and covered participants no later than March 3,2025 (for 2024 calendar year) .
Forms 1095-C include details on the offer of coverage:
Type of coverage offered and if the offer of coverage was made to the employee, spouse and child(ren) – Line 14
Lowest cost plan offered to employee (monthly premium cost for employee only coverage)- Line 15
Number of months during which the employee was enrolled or waived coverage and the affordability safe harbor that applied, or an explanation why coverage was not offered- Line 16
The fourth penalty, under Section 6722, is for failing to furnish a copy of Form 1095-B/C to employees and/or covered participants.
The penalties for failure to file in 2025, Forms 1094/1095-B or C for the 2024 calendar year with the IRS or failure to distribute those forms to covered employees and participants are are noted below:
- Complete and accurate filing submitted to the IRS on timely basis and copies of returns were distributed to employees and participants will receive no penalty.
- Complete and accurate filing submitted or if mistakes are identified, a new filing is submitted no later than 30 days from the filing date will receive a $60 penalty per return with a $664,500 annual maximum. A copy of the amended returns must be distributed to covered employees and participants.
- Complete and accurate filing submitted or an amended return is filed after 30 days but before August 1st will receive a $130 penalty per return with a $1,993,500 annual maximum.
- Complete and accurate filing submitted or an amended return is filed after August 1st will receive a $330 penalty per return with a $3,987,000 annual maximum.
- If returns are not filed and the IRS determines that the cause is ’s intentional disregard of filing requirements, the IRS will assess on an ALE, a $660 penalty per expected return, with no annual maximum cap.
Next steps to worry-free and penalty-free ACA compliance
With penalties for noncompliance around every turn, navigating the complexity of ACA requirements is difficult.
It’s easy to get lost trying to keep up with ongoing changes and avoid growing penalties.
But, with the right map, navigating this troublesome task can be made simple.
At Combined, that is exactly what our skilled ACA and benefits specialists want to assist you with. Our team has helped direct countless employers, just like you, towards ACA compliance.
We are confident that our personal and technological solutions can help guide you to your final ACA compliant destination.
This article 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.
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