The Affordable Care Act, also known as "Obamacare," contains provisions that insurers, employers, and individuals must comply with.
The primary provision that is applicable to employers is the employer shared responsibility mandate.
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. The ESR provisions apply to specific businesses that employ more than a specific number of employees.
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 Internal Revenue Service (IRS)
This article provides general information about what employers must do and when to comply with the health care law. The regulations are complicated, and there are many variables.
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 provisions of the Affordable Care Act (ACA).
First, you must determine whether 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 to be 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 full-time equivalent calculation.
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 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.
The trigger for this penalty is if one or more employees receive 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 incomes to help them purchase insurance through the Marketplace Exchanges. In 2021, the American Rescue Plan Act expanded these credits so that everyone buying insurance through the Marketplace is eligible for a subsidy to reduce the cost of their premiums.
The IRS will inform employers of any employee receiving a premium tax credit.
If an employer is subject to ESR requirements as described above, it must do one of the following:
- Offer affordable health coverage that provides a minimum level of coverage to their full-time employees (and their dependents)
- Offer health coverage to fewer than 95% of its full-time employees and the dependents of those employees
- Make ESR payments
Health Coverage/Health Insurance Requirements
The health insurance plan provided by the employer must:
- 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.
- Provide minimum value: Plans must cover at least 60% of the total allowed cost of benefits that employees can expect to have.
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. The IRS provides additional information about the Employer Shared Responsibility regulations.
Employers are required to keep records and send reports on this ESR provision. Failure to send reports can result in increased penalties and legal action.