Since its passage in 2010, the Affordable Care Act (ACA) has transformed the landscape of healthcare in the United States, introducing sweeping changes to how employers offer health insurance coverage to their workers. The ACA not only aimed to reduce the number of uninsured Americans, but also placed significant responsibilities on employers to provide adequate healthcare coverage. For many businesses, this has meant grappling with new regulations, compliance mandates, and potential penalties.
This blog will explore the key impacts of the Affordable Care Act on employers, with a particular focus on penalties for non-compliance, mandated plan benefits, and the options available to individuals and families when offered employer-sponsored coverage.
1. Introduction: The Affordable Care Act and Employers
The Affordable Care Act (ACA) brought about one of the most significant overhauls of the U.S. healthcare system in decades. Central to the law was a goal to increase access to affordable health insurance for all Americans, including employer-sponsored health insurance coverage. For businesses, especially those considered large under the ACA, the legislation introduced new rules about the type of coverage that must be offered, who must receive it, and what penalties could result from failing to comply.
This has had a profound impact on how employers design their health benefits, as well as the costs and administrative efforts involved in maintaining compliance with the law.
2. Employer Mandate: The ACA’s Requirements for Businesses
Applicable Large Employers (ALEs)
The ACA’s employer mandate applies to organizations classified as applicable large employers (ALEs)—those with 50 or more full-time employees or full-time equivalents. This mandate requires ALEs to offer health insurance that meets certain criteria or face penalties.
A full-time employee is defined by the ACA as someone who works 30 hours or more per week, on average. Employers below this threshold are not subject to the employer mandate but may still opt to offer health insurance.
The Employer Shared Responsibility Provision
The employer shared responsibility provision, commonly referred to as the employer mandate, requires ALEs to offer “minimum essential coverage” to at least 95% of their full-time employees (and their dependents) or face financial penalties.
To meet the mandate, the offered coverage must:
- Be affordable, meaning the employee’s share of the premium for the lowest-cost self-only coverage cannot exceed 9.5% of their household income (indexed annually).
- Provide minimum value, meaning the plan must cover at least 60% of the total allowed cost of benefits.
ACA Penalties for Non-Compliance
Employers who fail to meet the requirements of the ACA’s employer mandate face penalties, known as the employer shared responsibility payments. These penalties come in two forms, depending on the violation:
- Penalty A: If an ALE fails to offer health insurance to at least 95% of its full-time employees and at least one employee receives a premium tax credit for buying coverage through the ACA marketplace, the employer faces a penalty of $2,970 per full-time employee annually (in 2024), excluding the first 30 employees.
- Penalty B: If an ALE offers coverage but it is either not affordable or does not meet minimum value, and at least one employee opts for marketplace coverage and receives a premium tax credit, the employer faces a penalty of $4,460 per employee who receives the credit, up to a maximum of Penalty A.
These penalties create a financial incentive for employers to provide adequate health coverage that aligns with ACA requirements.
3. Mandated Plan Benefits Under the ACA
The ACA introduced several new standards for employer-sponsored health plans. These mandated benefits ensure that all qualifying health plans offer a comprehensive set of services to employees.
Essential Health Benefits
The ACA requires all health plans offered by ALEs to cover a set of essential health benefits (EHBs). These benefits are designed to ensure that all Americans have access to a minimum level of coverage that includes services such as:
- Emergency services
- Hospitalization
- Maternity and newborn care
- Mental health and substance use disorder services
- Prescription drugs
- Pediatric services, including dental and vision care
While small group and individual market plans are required to cover all EHBs, large employer-sponsored plans are not required to provide coverage for every category. However, many employers offer similar benefits to align with ACA standards and stay competitive.
Coverage of Preventive Services
One of the ACA’s most popular mandates is the requirement that health plans cover preventive services without charging a copayment or deductible. These services include annual wellness visits, immunizations, screenings, and counseling for conditions like diabetes, cancer, and heart disease. For employers, this has meant an increase in coverage requirements but also the opportunity to potentially reduce long-term healthcare costs by promoting preventive care.
Limits on Cost-Sharing and Waiting Periods
The ACA also sets limits on cost-sharing (such as deductibles and out-of-pocket maximums) to ensure that health plans remain affordable. In 2024, the maximum out-of-pocket limit for individuals is $9,450, and for families, it is $18,900. These limits protect employees from excessive financial burdens when they use their health insurance.
In addition, the ACA prohibits health plans from imposing waiting periods longer than 90 days for coverage to begin, ensuring that new employees gain access to benefits more quickly.
4. Changes to Coverage Options for Individuals and Families
The ACA not only affected how employers offer health coverage but also changed the options available to employees and their families. This is particularly important for individuals who may be eligible for ACA marketplace coverage.
Eligibility for Marketplace Health Plan Subsidies
One of the key features of the ACA is the availability of premium tax credits and subsidies to help individuals and families afford marketplace health plans. However, these subsidies are only available to those who are not offered “affordable” employer-sponsored health coverage that provides minimum value.
If an employee is offered affordable employer-sponsored coverage, they (and their family members) are not eligible for marketplace subsidies, even if they prefer to purchase coverage through the ACA marketplace.
Impact of Employer-Sponsored Plans on Individual Coverage Options
For employees who are offered health coverage by their employer, the decision to accept the employer-sponsored plan or explore marketplace options depends largely on the affordability and comprehensiveness of the employer plan.
- Affordability test: As noted, the employer-sponsored plan is considered affordable if the employee’s premium for self-only coverage does not exceed 9.5% (adjusted annually) of their household income. If the plan is deemed unaffordable, the employee may reject the employer plan and receive a marketplace subsidy.
- Spousal and family coverage: A key point of contention in the ACA is the “family glitch”, where employer-sponsored health insurance is considered affordable for the entire family if the employee’s individual premium is affordable—even if family coverage is significantly more expensive. Although there has been movement to address this issue, it remains a challenge for many families.
Affordability and the “Safe Harbor” Rule
For employers, determining whether their health plans are affordable can be complex, as they often don’t have access to employees’ full household income. To address this, the ACA introduced several “safe harbor” rules that employers can use to assess affordability. One of the most common is the W-2 safe harbor, where affordability is based on the employee’s income as reported in Box 1 of their W-2.
Employers using the safe harbor rules can avoid penalties as long as their contributions toward employee premiums meet the affordability threshold based on these criteria.
5. Administrative and Financial Challenges for Employers
The ACA has increased the administrative burden on employers, particularly for ALEs that must comply with complex reporting requirements and maintain up-to-date records on employee coverage status.
Increased Administrative Burden
The ACA requires employers to submit detailed reports to the IRS regarding the coverage offered to employees, including:
- Form 1095-C: This form provides details on the health coverage offered to each employee, including whether it was affordable and whether the employee was enrolled.
- Form 1094-C: This transmittal form is used to summarize the information provided on all 1095-C forms for a particular employer.
Failure to submit accurate reports can result in significant penalties.
Cost Impact of Expanded Coverage
The ACA’s expanded coverage requirements have had a financial impact on many employers, especially those that previously did not offer health insurance or only offered limited plans. Some of the cost drivers include:
- Increased premium costs for comprehensive coverage
- Higher administrative costs related to compliance and reporting
- The financial impact of penalties for non-compliance
Many businesses have had to adjust their benefits budgets to accommodate these changes, balancing the need to provide quality coverage with the rising costs of healthcare.
6. Conclusion: Navigating the Complexities of ACA Compliance
The Affordable Care Act has significantly reshaped the way employers offer health insurance, placing new obligations