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Does every business with 50 or more employees pay a penalty if it doesn’t offer ‘affordable, comprehensive’ insurance?

Businesses with 50 or more full-time equivalent (FTE) employees are required to offer health insurance coverage to their full-time employees (30+ hours per week) or they risk a penalty. | Image: leonidkos / stock.adobe.com

Businesses with 50 or more full-time equivalent (FTE) employees are required to offer health insurance coverage to their full-time employees (30+ hours per week) or they risk a penalty. | Image: leonidkos / stock.adobe.com

Does every business with 50 or more employees pay a penalty if it doesn’t offer ‘affordable, comprehensive’ insurance?

Q. Does every business with 50 or more employees pay a penalty if they don’t offer “affordable, comprehensive” health insurance?

A. Businesses with 50 or more full-time equivalent (FTE) employees are required to offer health insurance coverage to their full-time employees (30+ hours per week) or they risk a penalty. The employer mandate went into effect — partially — in 2015 for businesses with at least 100 FTE employees, and took effect in 2016 for those with at least 50 FTE employees.

But the penalty for not offering affordable, comprehensive coverage is only triggered if at least one of the employees obtains coverage in the exchange and receives a premium subsidy. The penalty varies depending on whether the employer doesn’t offer coverage at all, or offers coverage but it doesn’t provide minimum value and/or it isn’t affordable.

Employer doesn’t offer coverage at all

If an employer with 50 or more FTE employees doesn’t offer coverage to at least 95% of FTE employees, the potential penalty is $2,700 per full-time employee in 2021 (that amount started at $2,000, but it’s indexed for inflation; see question 55 in this IRS FAQ), although the first 30 employees aren’t counted in the calculation. So if an employer has 65 FTE employees, doesn’t offer coverage, and at least one employee gets coverage in the exchange with a premium subsidy, the employer would owe a $94,500 penalty for 2021. The calculation is: (65-30) x 2,700 = 94,500.

But if a business pays its workers wages that are high enough to ensure every employee’s household income would be too high to qualify for subsidies, there would be no penalty, since none of the workers would qualify for subsidies in the exchange. Of course, that’s rare, since large, high-wage employers almost always offer comprehensive health insurance coverage. And it’s even rarer in 2021 and 2022, since the American Rescue Plan (ARP) eliminated the income cap for subsidy eligibility. That doesn’t mean that the highest earners get subsidies now, but it does mean that households with income above 400% of the poverty level may qualify for subsidies — depending on the cost of the benchmark plan in their area — whereas that wasn’t the case pre-ARP.

Similarly, if none of the employees obtain coverage in the exchange despite being eligible for subsidies, the penalty would not be triggered. But that’s probably also very unlikely, given how much publicity the ACA has received for the last several years.

Coverage unaffordable, or too skimpy

If an employer does offer coverage but it’s not affordable and/or doesn’t offer minimum value, the employer would face a penalty if any full-time employees end up getting a subsidy in the exchange.

  • An employer-sponsored plan is considered unaffordable if the employee contribution for premiums is more than 9.83% of household income in 2021 for employee-only coverage (note that employers generally use affordability safe harbors, since they typically don’t know what their employees’ household income is).
  • To provide minimum value, an employer’s plan has to cover at least 60% of average expected medical costs, and provide “substantial coverage” for inpatient care and physician services.

If an employer’s plan is unaffordable and/or doesn’t provide minimum value, the employer would face the lesser of two penalty options: $4,060 per employee receiving premium subsidies in the exchange (this started at $3,000, but has also been indexed for inflation), OR the $2,700 per full-time employee (minus the first 30) penalty described above.

Consider a business that has 120 full-time employees and offers coverage, but it’s either not affordable and/or doesn’t provide minimum value: If 70 employees get subsidies in the exchange in 2021, the employer would pay a penalty of $243,000 for the year (120-30) x 2,700 = 243,000, since that’s smaller than the alternative penalty calculation (70 x 4,060, which would be $284,200).

But if only 20 of the employees get subsidized coverage in the exchange, the employer would pay $81,200 for the year (20 x 4,060 = 81,200), since that’s smaller than the alternate calculation of (120-30) x 2,700, which would be $243,000.

Individual mandate penalty was eliminated, but employer mandate penalty remains in place

Although the GOP tax bill that was enacted in late 2017 repealed the individual mandate penalty starting in 2019, it did not make any changes to the employer mandate. Large employers that don’t offer coverage, or that offer coverage that doesn’t provide minimum value and/or isn’t affordable, continue to face penalties if their employees obtain subsidized coverage in the exchange.

Read answers to other questions about health reform, and penalties, and small business.


Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org. Her state health exchange updates are regularly cited by media who cover health reform and by other health insurance experts.

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Rod Humphrey
9 months ago

Lets simplify this, the penalty is either $225.00 per month ($2700 p/yr) or ~$338 p/month($4100 /yr), and I’ve never seen any premium at any level close to that regardless of the age/location or incomes since the implementation of ACA, have you? Forget a minute that you’d get credit for 30 employees off the penalty calculation why would any company regardless of their # of employees pay for even single coverage and not pay the penalty? If I were a company, I’d much prefer to pay the penalty, and let the employees go out on their own to the exchanges, and fend for themselves. If they get a subsidy, so be it. I can’t understand why so many make this issue so complicated. When employees then face $3,000->$6,000 Deductibles per person up to 2 or 3 in some cases up front, then pay an additional 80% thereafter to $9,000->~$18,000 out of pocket or more by having kids or a spouse as well in a employer sponsored Group med plan, and potentially almost next to nothing through the exchange w/or without a subsidy (relatively speaking vs group coverage by going through the exchange) Where could any company buy any kind of group coverage for $338 a month per employee even under a group limited self funded method? I’ve seen premiums for 64 year olds in the cities pay premiums well over $2000 a month for coverage for single coverage near Phile, and I’d guess other bigger cities where office and routine medical costs are much higher than more rural areas.

That’s what happens when you push mandates on companies, and don’t think through it! If you want companies to pay for the employees insurance (the carrot), and then slap them with a tiny little relative penalty (the stick) I’d take the penalty every time, and then take the savings and give it back to the employees in other forms like bonuses, additional profit sharing contributions etc. I’ve yet to see full Platinum plans offered as an individual through the exchange with or without a subsidy that is anywhere near as the high of the cost of group plans relative to benefits received.

In using your numbers above, with 120 employees (if all got a subsidy), Penalty would be $2700*120=$487,200 or $4100*120=$492,200, Worse case scenario. I’d set back, and look at the $492.200/12 (months)=$41,000 per month in premium worse case, and realize I couldn’t insure 120 ee’s per month for $41,000 per month, I’d guess the premium on average for 120 employees would be closer to $100K p/month or $1.2 Million a year, and that would show worse case of $700,000 a year in savings over worse case penalty to spread over 120 employees which would be a nice annual bonus of nearly $6000 for each and every single year or more simply $500 a month to deal with any increase with little or no relative deductibles vs group!!! If Uncle Sam wants them that bad, I’d say give them all of my employees, I’ll pay the fine every time! It’s not that complicated! Am I wrong?

Rod

Louise Norris
Editor
9 months ago
Reply to  Rod Humphrey

A robust benefits package is a strong recruitment and retention tool. Health benefits are seen as a “must-have” by the majority of job seekers, and companies know that. Yes, they could design benefits packages that don’t include health coverage, but it would put them at a disadvantage when compared with peer companies.

Some employers are switching to ICHRAs, giving employees money they can use to purchase coverage in the individual market. We may see more of this as time goes on, and employers that offer ICHRAs can use them to fulfill the employer mandate as long as the ICHRA is generous enough for the employee’s self-purchased coverage to be considered affordable.

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