What Is the ACA’s Employer Mandate?

The Affordable Care Act’s employer mandate requires large businesses in the United States to offer affordable, comprehensive health coverage to full-time employees. Businesses that don’t comply face financial penalties if any of their full-time employees end up enrolling in marketplace coverage with premium tax credits.

The employer mandate is officially known as the employer shared responsibility provision.

This article will explain all the details, including the threshold between small and large employers, what counts as full time, the comprehensiveness and affordability rules under the employer mandate, and how the penalties are structured.

How Is “Large Employer” Determined?

If an employer has 50 or more full-time equivalent employees, the employer is considered an applicable large employer (ALE) under IRS rules. Under the employer mandate, an ALE must offer health coverage to full-time employees and must also report coverage details to the IRS (including an offer of coverage even if the employee rejects it).

Full-time employees are defined as those who work at least 30 hours per week. Full-time equivalent (FTE) means a combination of employees who each work fewer than 30 hours per week but whose combined hours would equal a full-time employee. HealthCare.gov has an FTE calculator that employers can use.

Since the ALE determination is based on full-time equivalent employees, a large employer cannot avoid being an ALE by employing a mostly part-time workforce.

Part-time employees do not have to be offered health coverage, but coverage would have to be offered to any full-time employees, and the ALE would have to report coverage offers and details to the IRS.

What Does the Employer Mandate Require?

If a business is classified as an ALE, it must offer affordable, comprehensive health coverage to at least 95% of employees who works at least 30 hours per week.

But it’s also important to note that if an employer offers multiple plans, the least-expensive option is used to determine whether the employer is in compliance with the employer mandate (assuming that it’s a plan that is comprehensive enough). This is true even if an employee selects a more expensive option.

Affordable Coverage

An employer’s offer of coverage is considered affordable if the payroll-deducted premium—for just the employee, not including family members—doesn’t exceed a set percentage of the employee’s household income.

Under the ACA, this threshold was initially set at 9.5%, but it’s indexed each year; in 2023, it's 9.12%, which is down from 9.61% in 2022. The affordability test only applies to the employee’s premiums. The cost to add family members is not taken into consideration.

This is true even though the "family glitch" fix allows some employees' family members to obtain premium subsidies in the exchange as of 2023 if their offer of employer-sponsored coverage is affordable for the employee and not the whole family. The fix for the family glitch doesn't affect anything about an ALE's responsibility to offer affordable coverage: They still just have to ensure that the coverage offer is affordable for the employee.

ALEs are required to offer coverage to full-time employees and their dependents (but not their spouses). They’re required to pay enough of the employee’s premiums to ensure that the coverage is considered affordable for the employee.

However, they are not required to pay any portion of the cost to add dependents to the plan. Most ALEs cover a significant portion of the cost of dependents’ coverage to create a benefits package that attracts and retains a high-quality workforce.

If, however, an employer chooses to make employee-only coverage affordable but not contribute anything to the cost of dependent coverage, the employee’s family members (who are eligible to enroll in the employer-sponsored plan) may find that they're newly eligible for premium subsidies in the exchange as of 2023. This is due to the family glitch fix that the IRS implemented in the fall of 2022.

Minimum Value = Comprehensive Coverage

To comply with the employer mandate, ALEs have to offer coverage that’s comprehensive enough to provide "minimum value.”

This means that the plan has to cover at least 60% of average costs for a standard population (the same actuarial value requirement that applies to bronze plans sold in the individual and small group markets) and provide “substantial” coverage for inpatient treatment and physician services.

To be clear, large group plans are not required to cover the ACA’s essential health benefits, with the exception of preventive care (certain preventive care must be covered in full by all plans, including large group and self-insured plans unless they’re grandfathered).

The rest of the essential health benefits are normally covered on large group and self-insured health plans, but they do not have to be.

The requirement that large employers offer “substantial” coverage for inpatient and physician care means that the plan has to essentially be major medical coverage.

Before the ACA, some large employers—particularly those with low-wage, high-turnover workforces—chose to offer “skinny” plans that didn’t provide much in terms of real health insurance coverage.

These plans would often cover preventive care and some primary care, but would have very low benefit caps (sometimes just a few thousand dollars) for any sort of significant medical care, including hospitalization.

ALEs can still choose to offer these “skinny” plans, but that will potentially make them subject to an employer mandate penalty.

Penalties for Large Employers That Don’t Comply

The ACA’s employer mandate has two different penalties for noncompliance. One applies if an ALE simply doesn’t offer coverage to at least 95% of its full-time employees. The other penalty applies if coverage is offered but it’s not affordable and/or doesn’t provide minimum value, as described above.

Penalty If Coverage Isn’t Offered

If an ALE doesn’t offer coverage to at least 95% of its full-time employees and if at least one full-time employee obtains coverage in the health insurance marketplace and qualifies for a premium subsidy, the employer is subject to a penalty.

In this case, the penalty is calculated by taking the number of full-time employees the ALE has, subtracting 30, and then multiplying by the per-employee dollar amount, which is indexed annually. $2,880 is the amount that applies in 2022.

For example, if an ALE has 100 full-time employees, doesn’t offer health coverage to at least 95 of them, and at least one of them obtains subsidized coverage in the marketplace, the ALE’s penalty for 2023 would be as follows: (100 - 30) x 2,880 = $201,600.

Penalty If Coverage Isn’t Affordable or Comprehensive Enough

If an ALE offers coverage, but it doesn’t provide minimum value and/or doesn’t meet the affordability requirements, there is a separate penalty under the employer mandate. However, the law stipulates that this penalty cannot be larger than the penalty that applies if the employer doesn’t offer coverage at all.

For 2023, the penalty is $4,320 multiplied by the number of full-time employees receiving subsidized coverage in the marketplace.

For example, an ALE with 100 full-time employees offers coverage to all employees, but the coverage isn’t affordable and/or doesn’t provide minimum value. If 10 employees opt for the marketplace instead and are eligible for premium subsidies, the ALE would pay a penalty equal to $43,200 (that’s $4,320 multiplied by 10).

But if all 100 employees opt to enroll in marketplace coverage and all of them are subsidy eligible, the employer’s penalty would be $201,600, as calculated above in the penalty that applies if coverage isn’t offered at all.

That’s because the other method of calculating the penalty (in this case, $4,320 multiplied by 100, or $432,000) would be larger, and that’s not allowed. Instead, the ALE will pay the penalty that would have applied if they simply hadn’t offered coverage at all.

However, the chances are slim that all 100 employees would enroll in the marketplace and qualify for a subsidy. Some might opt for the employer’s plan simply because they don’t realize it’s poor quality or don’t mind. Others might be eligible for coverage under a spouse’s plan and opt for that instead.

What If I Work for a Small Business?

Businesses that aren’t ALEs are not required to offer health coverage to any of their employees, regardless of whether the employees work full time.

In most states, small group health insurance can be purchased by businesses with up to 50 employees. (In four states, small group plans are sold to businesses with up to 100 employees.) So, most employers that are eligible to purchase coverage in the small group market are not required to offer health benefits.

But there is a slight amount of overlap: A business with exactly 50 employees will be buying coverage in the small group market (unless they opt to self-insure), which means that the coverage is required to follow the ACA’s rules for individual and small group coverage.

And yet, the employer is also considered an ALE if they have exactly 50 full-time employees, which means they’re subject to the ACA’s employer mandate.

If you work for a business that has fewer than 50 employees, they may or may not offer health benefits. If they don’t, you can enroll in a health plan through the marketplace in your state and obtain subsidies depending on your household income.

If you work for a small business that does offer health benefits, you have the option to accept it or reject it. But the same rules about affordability and minimum value are used to determine whether you’re eligible for a subsidy in the marketplace.

If the small business offers a health plan that’s affordable and provides minimum value, you won’t be eligible for a marketplace subsidy. If the employer's plan isn't considered affordable for the whole family, your family members may find that they're eligible for a marketplace subsidy, depending on the total household income versus the cost of their coverage in the marketplace (again, this is due to the family glitch fix that the IRS implemented for 2023 and future years; subsidies were not available in these scenarios prior to 2023).

Summary

The ACA’s employer shared responsibility provision, also known as the employer mandate, requires large employers to offer affordable, comprehensive health coverage to their full-time employees. If an employer doesn’t comply and then has full-time employees who obtain subsidized coverage in the marketplace/exchange, the employer can be subject to financial penalties.

A Word From Verywell

If you work at least 30 hours a week for a large employer, they likely offer fairly robust health benefits. But if you’re not offered coverage, or if the coverage you’re offered doesn’t meet the affordability or comprehensiveness tests, you can apply for coverage in the marketplace and potentially qualify for subsidies to offset the cost.

You can have your employer complete the Employer Coverage Tool form at Healthcare.gov to determine whether the coverage is affordable and comprehensive. Depending on the circumstances, your employer may then be subject to a financial penalty.