The Affordable Care Act (ACA) changed the way U.S. businesses approach employer health insurance by making employer-sponsored coverage mandatory for businesses with 50 or more employees. In addition to health insurance requirements, certain details of the ACA can sway employers’ and employees’ options, and hefty tax penalties arise if these requirements aren’t met. The more details employers, providers, and consumers are aware of, the better everyone can navigate the changing landscape of health care reform.
Rules and Regulations
Simply put, employers with 50 or more full-time equivalent employees (FTE) are required to provide health insurance to avoid a tax penalty.
The Employer Mandate
The tax penalty provision of the ACA is referred to as the employer mandate (or the Employer Shared Responsibility (ESR) payment) and applies to large employers who neglect to provide employee-sponsored insurance. The penalty includes a fee of $2,000 per full-time employee.
The Health Reimbursement Arrangement (HRA)
Instead offering full-time employers comprehensive health insurance, some large employers find it more cost-effective to pay the ESR and offer an HRA to their employees. An HRA is like a savings account for each employee that’s refilled annually and used only on health care expenses (and is compatible with any health insurance plan sought by the employee). An employee can use their HRA on eligible medical expenses, including deductibles, coinsurance, and copays.
Small businesses are defined as averaging fewer than 50 full-time employees annually and are not required to provide employer-sponsored health insurance. Small businesses that choose to provide health insurance, despite not being required to do so, may qualify for tax credits. Depending on the average wage of employees, an employer can receive up to 50 percent of total paid employee premiums in tax credit.
Common Questions
The following questions and answers will help businesses understand the stipulations of the ACA:
- How are FTE employees determined? To be considered a full-time employee, an individual must work an average of 30 hours per week in a month.
- What must an employer’s plan cover? Employers must provide a minimum essential coverage for each full-time employee and their dependents. Minimum value means 60 percent of total benefit costs. Additionally, the plan must be considered affordable to each employee — or 9.5 percent or less of their annual household income.
- What happens if an employer sponsored coverage meets the minimum essential coverage, but is not considered affordable to one or more employees? If an employee is paying more than 9.5 percent of their annual household income and is eligible to receive cost-sharing subsidies, the employer is subject to a monthly penalty. The penalty is $3,000 per full-time employee annually or $250 per person per month.
- If an employer doesn’t offer insurance, do employees have to purchase healthcare on their own? The ACA requires all non-exempt individuals to obtain health insurance. If an employee chooses not to obtain insurance, they are subject to a tax penalty that increases over a three-year period. The 2017 penalty for uninsured individuals is either $695 or 2.5 percent of their income, whichever amount is greater. (Note: The penalty can’t exceed the national average annual premium for bronze-level health insurance.)
- Are there employee exceptions to the ACA? The ACA doesn’t apply to individuals who are incarcerated, members of Native American tribes, undocumented immigrants, exempt from taxes due to insufficient income, refuse insurance for religious purposes, or who would pay more than 8% of their income for health coverage.
Resources
Mandelbaum, R. Should Your Small Business Offer Health Insurance? (2016, July 25). Time Magazine. Retrieved from http://time.com/money/4397586/small-business-health-insurance/
Merhar, C. Does Your Employer Have to Provide Health Insurance? (2014, February 4). Zane Benefits. Retrieved from https://www.peoplekeep.com/