Employer Shared Responsibility Provisions of Obamacare
Employer Mandate Requirements effective January 1, 2015
What is Employer Shared Responsibility?
Employer Shared Responsibility (ESR) is a term used to describe businesses that must comply with certain provisions of the Affordable Care Act (AKA "Obamacare"). The ESR provisions apply to specific businesses that employ more than a specific number of employees (more details below). The ESR requires these employers to either:
- Offer employees a minimum amount of health insurance for themselves and their dependents, or
- Make an ESR payment to the IRS.
This article provides general information about what employers must do and when to comply with the health care law. The regulations are extremely complicated, and there are many variables. This is a general discussion, with links provided to additional information. Before making any decisions or taking any action relating to the information discussed, be sure to discuss with your attorney or employee benefits specialist.
Does My Business Have to Comply with ESR Provisions?
There are several steps in the process of determining whether your business is subject to the Employer Shared Responsibility (ESR) provisions of the Affordable Care Act (ACA).
First, you must determine if your business must comply. The ESR provisions apply to what the IRS calls Applicable Large Employers (ALEs). An Applicable Large Employer is a business that has a specific number of employees in a calendar year. The IRS says,
To be an ALE for a particular calendar year, an employer must have had an average of at least 50 full-time employees (including full-time equivalent employees) during the preceding calendar year.
So, you must look at your employees and figure out if your business meets the level of 50 full-time equivalent (FTE) employees. For this purpose, an employee is considered full-time if he or she works an average of at least 30 hours a week. Employees who work less than full-time are counted as a percentage and added together for the FTE calculation. This article on full-time equivalent describes the calculation in more detail.
Then, if your business has the minimum number of full-time equivalent employees for a calendar year, the ESR provision comes into effect for your business. For the next calendar year, you must offer affordable health coverage that provides a specified minimum level of coverage to your full-time employees and their dependents. If you don't offer this coverage, you may be required to pay a penalty.
Insurance and Payments Requirements
Employers who meet the Employer Shared Responsibility requirements (see below) must either pay for insurance coverage that meets specified minimum levels for employees and their families or make an annual payment. You must be able to show that you have offered this coverage to employees.
Third, note that the trigger for this penalty is if one or more employees receives a premium tax credit for purchasing individual coverage through a state or federal exchange. Your business, as an employer, will not be liable for an Employer Shared Responsibility payment unless at least one full-time employee receives a premium tax credit. (A premium tax credit is available to individuals with low or moderate income to help them purchase insurance through the Marketplace Exchanges.) The IRS will inform employers of any employee receiving a premium tax credit.
If an employer is subject to ESR requirements as described above, the employer must:
- offer affordable health coverage that provides a minimum level of coverage to their full-time employees (and their dependents)
- Offer health coverage or offers coverage to fewer than 95% of its full-time employees and the dependents of those employees OR
- Make ESR payments.
Health Coverage/Health Insurance Requirements
The health insurance plan provided by the employer must be:
- Affordable. To be affordable, the employee’s share of the premium for employer-provided coverage would cost the employee less than 9.5% of that employee’s annual household income. As you can imagine, this is a complicated calculation.
- Provide minimum value. The IRS says, "A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan."
Employer Shared Responsibility Fines and Penalties
Fines and penalties must be paid by employers if not enough employees are eligible for coverage and if the coverage is unaffordable or doesn't meet minimum levels of coverage.
These regulations are complicated, and many specific details and exemptions apply. Read more about Employer Shared Responsibility and how the IRS determines payments on this web page: IRS about the Employer Shared Responsibility regulations.
Reporting Requirements for Large Employers
Employers are required to keep records and send reports on this ESR provision. See this article on the reporting requirements of the employer shared responsibility mandate.