10th Birthday Wishes to the Affordable Care Act’s Employer Mandate

The Patient Protection and Affordable Care Act (“ACA”) was signed into law by President Obama on March 23, 2010. ACA affected health insurance coverage, costs and preventive care. It also established the Health Insurance Marketplace allowing individuals with certain income thresholds to obtain affordable health care regardless of employment status. The Biden Administration reported that 21.3 million people selected ACA Health Insurance Marketplace coverage in the 2024 open enrollment period.

Two critical provisions of ACA apply only to applicable large employers (“ALEs”) – the employer shared responsibility provision (referred to as the pay or play mandate), and the employer information reporting provision of minimum essential health coverage offers. The employer requirements were scheduled to begin in 2014, but because the employer community was not prepared to comply, they were postponed until 2015. ALEs that sponsor self-insured group health plans have additional information reporting requirements.

Summary of ALE Requirements:

ALE status must be determined each calendar year based on the average size of the ALE’s workforce during the prior year. Employers that had at least 50 full-time employees, including full-time equivalent employees, on average the prior year, are ALEs for the current year.

ACA requires ALEs to offer affordable healthcare options to 95 percent of their full-time employees that provides minimum value through affordable offers. To determine if a healthcare option is affordable, each employee’s cost of single coverage must not exceed a percentage of W-2 income. In 2024 for coverage to be considered affordable, single employee coverage must cost no more than 8.39 percent of the employee’s annual salary. The IRS announced on September 9, 2024 that the 2025 threshold amount will increase to 9.02 percent of W-2 income. ALEs should review their employer and employee contribution amounts based on the new annual percentage to confirm they are subsidizing enough of each employee’s cost for coverage. The salary cost analysis is based upon the cost for employee-only coverage and does not take into account the cost of spousal or family coverage. To determine whether coverage is affordable under ACA, the IRS provides three safe harbors that ALEs may use: W-2 wages, an employee’s rate of pay, or the federal poverty line. ACA requires ALEs to report and certify annually to the IRS on Form 1094-C that they are offering affordable health care coverage to at least 95 percent of the ALE’s full-time employees. Penalties assessed against ALEs are based on information provided on these forms, or on the ALE’s failure to submit Form 1094-C.

ALEs that fail to certify offers at the 95% level and with minimal essential coverage have received IRS assessments of ACA penalties. An employer that receives an IRS assessment has 30 days to contest the proposed IRS penalties.

Between 2015 and 2022 the IRS provided relief from penalties for ALEs that showed a good faith effort to comply with ACA requirements when ACA reporting was done incorrectly or incomplete. On November 22, 2021, the Treasury Department and the IRS issued a regulation that stated that good faith effort relief from penalties will no longer be in effect and employers will be held accountable for not abiding by ACA requirements. However, the IRS 2021 regulation preamble noted that the Code Section 6721 and 6722 penalty relief for “reasonable cause” will continue to be available under Code Section 6721. IRS Publication 1586 explained that reasonable cause can be demonstrated by showing “that they acted in a responsible manner both before and after the failure occurred and that there were significant mitigating factors with respect to the failure . . . or the failure was due to events beyond the filer’s control.”

IRS enforcement efforts have become more sophisticated, and more timely penalty notices have been issued against employers who fail to comply with ACA requirements. Certain state ACA reporting deadlines have also been implemented in New Jersey, Rhode Island, Washington D.C., and Massachusetts.

IRS Enforcement Efforts:

The IRS enforcement of ACA compliance increased after the 2022 Inflation Reduction Act provided $80 billion in supplemental IRS funding, roughly a 60% budget increase. Due to the specter of increased IRS enforcement, ALEs should analyze their health care offerings and data to confirm which employees qualify for offers of subsidized coverage. The required duty is to offer the required coverage, not to provide it unless the offer for coverage is accepted.

The Two ACA Penalties:

ALEs that do not offer an affordable health care option may owe an employer shared responsibility payment to the IRS. A penalty may be assessed if the ALE does not offer minimum essential coverage to at least 95 percent of its full-time employees, and at least one full-time employee receives the premium tax credit for purchasing coverage through the Health Insurance Marketplace. An ALE may owe an employer shared responsibility penalty for each full-time employee who receives the premium tax credit for purchasing coverage through the Marketplace if: (1) the minimum essential coverage the employer offered does not meet the affordability requirement; (2) the minimum essential coverage the employer offered does not provide minimum value; or (3) the employee is not one of the 95 percent of the full-time employees offered minimum essential coverage.

The initial annual IRS filing deadline of January 31 for IRS Form 1094-C, and the deadline to provide IRS Form 1095-C to full-time employees were extended annually and have been permanently fixed as March 2. Penalties are assessed on a tiered basis: late or corrected Forms 1094-C filed between April 1 and April 30 could subject ALEs to a $50 penalty fee per form. For forms filed between May 1 through August 1 the penalty increases to $110 per form, and after August 2 the penalty increases to $280 per form.

Recent Updates and Litigation Activity:

ACA and its associated employer mandates have been challenged in the courts as unconstitutional since their inception. A recent decision by the Fifth Circuit Court of Appeals in June 2024 may be heading to the U.S. Supreme Court. The Justices have not yet announced if they will take the case. The U.S. Department of Health and Human Services (HHS) has asked the Supreme Court to review the lower court’s decision that partially invalidated an ACA insurance mandate for preventive health services recommended by an HHS advisory board. HHS is challenging the decision that members of HHS’s Preventive Services Task Force, comprised of 16 volunteer doctors and nurses who practice in preventive medicine, were not properly appointed.

A Texas ALE challenged the HHS advisory board’s recommendation for colorectal cancer screenings and drugs to prevent HIV infections based on religious grounds. Braidwood Management Inc. did not want to cover the screenings and HIV drugs, primarily used by gay men, based upon its religious beliefs. The religious right claims in the case were settled before it went to the Fifth Circuit.

The appeal involves the Appointment Clause of the U.S. Constitution which requires principal U.S. officers to be appointed by the President and approved by the Senate. HHS argues that the HHS Preventive Services Task Force members are inferior officers and thus not subject to the Appointment Clause. The Fifth Circuit Court upheld a decision from the Texas Northern District Court Judge, Reed O’Connor, that the task force members hadn’t been properly appointed. The Fifth Circuit Court also narrowed the remedy to only the plaintiffs and vacated orders that would have affected employee health plans nationwide.

IRS Penalties Assessed:

The first IRS penalty notices were issued to ALEs in 2017 for the 2015 tax year. Approximately 50,000 notices assessing $4.5 billion were distributed to the ALEs. In 2018, 37,000 notices were distributed, and enforcement of these penalty provisions has continued. The IRS continues to enforce ACA compliance, and the penalties increase quickly for ALEs because the penalties are assessed per form and the 1095-C forms must be sent to all employees.

For the 2024 tax year the §4980H(b) employer shared responsibility penalty is $372 a month, or $4,460 per year, per employee, an increase from $4,320 per year, per employee in 2023. Additionally, for ALEs that do not offer minimum essential coverage, the §4980H(a) penalty is $247.50, or $2,970 annualized, per employee. This is an increase from the 2023 penalties that were $240 monthly and $2,880 annualized. Employer shared responsibility payments are not deductible for federal income tax purposes.

Political Changes:

The political changes that will occur within the next few months with a new presidential administration, and the fact that ACA was a topic of discussion at the recent presidential debate, are signals that changes may occur regardless of the administration change in 2025. Repeal of ACA is unlikely, so ALEs should be prepared to evaluate their health care offerings, file the Form 1094-C with the IRS timely and accurately, and send all employees the Forms 1095-C timely.

When ACA was first enacted in 2010 it included a federal tax on individuals who did not have health care during all or part of the year, known as the individual mandate. The Tax Cuts and Jobs Act signed by President Trump in 2017 repealed ACA’s individual mandate tax penalty. Therefore, the individual federal tax penalties were no longer in effect as of 2019 forward, but some states, including New Jersey and at least three other states, require certain tax filers to certify that they have health coverage.

2025 Plan Design Considerations:

ALE status must be determined each calendar year based on the number of full-time employees. ALEs must also evaluate their health care options and determine if each employee’s cost of employee only coverage meets the 2025 salary income percentage to satisfy the affordability requirement. Health care offerings must also comply with the minimum essential coverage requirements of the ACA. To reduce the penalty exposure ALEs must ensure accurate data keeping practices and review their ACA compliance requirements monthly as employee populations and salaries change.

For questions or assistance in helping your organization comply with the ACA employer responsibilities please contact Patrick W. McGovern, Esq., a Partner in the Employment Law and Labor Law Practice Groups via email here or Judith R. Kramer, Esq., Counsel in the Employment Law and Labor Law Practice Groups via email here.