Understanding the ACA's Employer Responsibilities and the Impacts of the Delay in Employer Penalties

July 5, 2013

Download the full report here: Employer ResponibilityEmployer Responsibilities


The Obama administration announced a delay of the penalties in the ACA’s employer mandate for one year.[1] What does this mean? As best as we can determine it has relatively little to no impact. So what is going on? And why?

The penalties apply to large and mid-sized employees whose full time, permanent employees use tax credits in the Exchange.[2] Full time means more than 30 hours a week, permanent means employed more than 90 days. Tax credits mean the premium subsidies available to individuals and families with incomes of less than 400% of the federal poverty level (about $45,000 for an individual).


Small employers

There is no impact on small employers because there is no requirement for small employers to offer coverage in the ACA. According to the most recent California Employer Survey[3], 71% of employers with from 10 to 49 employees offer coverage. And 49% of employers with from 3 three to 9 employees offer coverage. In 2014, small employers are eligible for a tax credit for up to 50% of their premium cost; the credit varies by size of employer and level of wages. The smaller and lower wage employers get the largest credits. These credits (albeit at a lower maximum 35% rate) have been in effect since 2010 so those small employers who are using them can continue to use them with a higher level of tax credit; however, these small employer credits beginning in 2014 are only good for two years and only available through the SHOP, the small business component of the Exchange. To summarize, there is no penalty for small employers only a potential tax credit; the delay in the penalty does not impact small employers, and there is no delay in their tax credits.


Mid-sized and large employers already offering coverage

There is little impact on medium and large employers who offer coverage because virtually all offer coverage already. According to the most recent California Employer Survey[4], 92% of employers with from 50 to 199 employees offer coverage, 97% of employers with from 200 to 999 employees offer coverage, and 98% of employers with over 1,000 employees offer coverage. However some mid-sized to large employers who offered coverage to some classes of workers but not others (e.g. manufacturing, but not sales; or management and supervisors but not field workers) could face a penalty; we’ll call these partially offering employers. If one or more of the full time permanent employees of a partially-offering mid-sized or large employer uses the tax credits through the Exchange, the employer must pay a penalty of $3,000[5] for each full time employee that is using tax credits in the Exchange.


Mid-sized and large employers not offering coverage

For the mid-sized and large employers who do not offer coverage[6], there is a one-year delay in the potential penalties. What are these penalties? If one or more of the full time employees of a not-offering mid-sized or large employer uses the tax credits through the Exchange, the employer must pay a penalty of $2,000 per full time employee equivalent (minus 30 employees). So a non-offering employer of 60 full time equivalent employees must pay a penalty of $2,000 times 30 if one of its full time employees uses subsidies in the Exchange. In California, the average employer expenditure was $6540 for employee only coverage.[7] So for many non-offering employers, paying the penalty is less costly than offering coverage.


The interface with the Exchange (Covered California)

Any individual and any small employer can apply for and purchase coverage through the Exchange. Any individual with incomes less than 400% of FPL and greater than 100% of FPL can receive premium subsidies (tax credits) through the Exchange to help pay their monthly health insurance premiums. However an individual who is eligible for coverage through their employer cannot get the tax credit/premium subsidy unless their share of premium for the employee’s employment based coverage is unaffordable (i.e. exceeds 9.5% of the employee’s income).



Now to the complicated part, if I’m an employer offering coverage, I report the amount I pay for health coverage to the IRS because I get a deduction for that cost. But I do not yet report the names and social security numbers of the employees who I cover. I do not report which employees are full time and which are part-time. I do not report which employees have declined and which have accepted coverage. I do not report which are seasonal and which are permanent employees. If I offer several different benefit options and plans, I do not report which plans and which benefit levels have been selected by which employees. I don’t report the share of premium that I pay and the share that my employees pay. I don’t differentiate in my reporting between the health coverage expenses I incur for my employees as opposed to my expenses for their dependents.

The ACA does require employer reporting in order to verify who has to pay the penalty if their employee(s) use them. The ACA requires employers to report: whether it offers its full time employees coverage, the length of any applicable waiting period, the lowest cost options for their employees, the employer’s share of the premium and the names and social security numbers of employees receiving coverage.[9]


Impact on ACA implementation

The reasons for the delay are to simplify employer reporting. Some non-offering employers may also be seeking clarifying exemptions (e.g. increasing the number of hours to qualify as full time) to avoid the penalty. The fundamentals of the ACA: the Exchanges, the tax credits, the insurance reforms of guaranteed issue and no more pre-existing condition exclusions, and the Medicaid expansions are moving forward.


[2] Affordable Care Act §1513

[3] California HealthCare Foundation, California Health Care Almanac: California Health Benefits Survey, Fewer Covered, More Cost (April, 2013) at www.chcf.org

[4] Ibid.

[5] Affordable Care Act §1513

[6] The non-offering mid-sized and large employers are typically those with a high percentage of low wage workers, like fast food restaurant chains and large agri-businesses. The advantages of employment-based coverage are the large financial advantages of pre-tax purchasing. This equals on average 30% of the cost of the premium; however the tax advantages of this structure primarily inure to the benefit of high wage workforces with high marginal tax rates – i.e. lawyers and doctors, rather than fast food and agri-business employees.

[7] California Health Care Almanac: California Health Benefits Survey, Fewer Covered, More Cost

[8] Affordable Care Act §1514

[9] Ibid.