Employer Shared Responsibility (ESR), also known as the “employer mandate,” is a provision under the Affordable Care Act (ACA) that requires certain employers to offer health insurance coverage to their employees. This provision aims to ensure that all Americans have access to affordable healthcare by spreading the cost of healthcare coverage across a large pool of individuals and employers. Let’s explore the basics of Employer Shared Responsibility and how it affects businesses.
Understanding the Basics of Employer Shared Responsibility
The ACA classifies those with 50 or more full-time workers (FTEs) as “applicable large employers” (ALES) and imposes the Employer Shared Responsibility provisions on them. A full-time employee works an average of 30 or more hours per week or 130 or more monthly. To determine whether an employer is an ALE, they must calculate their total number of full-time and equivalent employees.
The ACA requires ALEs to offer affordable, minimum essential health coverage to their full-time employees (and dependents) or face a penalty. The employer mandate is broken down into two parts: the ALE must offer coverage that meets minimum essential coverage requirements, and the coverage must be affordable.
What is Minimum Essential Coverage (MEC), and Why is it Important?
Minimum Essential Coverage (MEC) is the type of health coverage that satisfies the individual mandate requirement of the ACA. MEC includes most employer-sponsored plans, including self-insured plans and marketplace coverage. The ACA also sets a minimum actuarial value (AV) requirement for health insurance plans. AV is the percentage of healthcare expenses that the insurance plan covers. The ACA requires that a health plan has an AV of at least 60%.
Affordability is determined based on the employee’s household income. The ACA sets a standard of affordability that requires the employee’s contribution for self-only coverage to be no more than 9.5% of their household income. An employer may face a penalty if they fail to meet the MEC or affordability requirements.
Strategies for Ensuring Compliance with Employer-Shared Responsibility
To comply with provisions of Employer Shared Responsibility, ALEs must file forms 1094-B and 1095-C. Form 1094-B is used to report the employer’s offer of health coverage to their employees, while form 1095-C is used to inform the employee’s enrollment in the health coverage offered by the employer. Employers must file these forms annually with the Internal Revenue Service (IRS).
The penalties for failure to follow the Employer Shared Responsibility provisions can be significant. For the 2021 tax year, the penalty for failing to offer affordable minimum essential coverage is $2,700 per employee. The penalty for offering coverage that does not meet the minimum essential coverage requirements is $4,060 per employee.
In a Nutshell
Employer Shared Responsibility is a provision under the Affordable Care Act that requires certain employers to offer affordable, minimum essential health coverage to their full-time employees (and their dependents). Employers must meet the MEC and affordability requirements and file forms 1094-B and 1095-C annually with the IRS. Failure to comply with the Employer Shared Responsibility provisions can result in significant penalties for employers.