What does the Affordable Care Act mean to my company
The ACA is necessary to understand and abide by so that as an employer you can provide adequate healthcare to your employees and avoid penalty fees. In this article we’ll walk you through the following:
- Background on the Affordable Care Act
- Employer eligibility
- Employer requirements for the ACA based on employer size category
- Tax credits
Then, we’ll discuss ACA reporting requirements including which forms to fill out, the thresholds for affordability, and deadlines for getting this information submitted to the IRS.
What is the Affordable Care Act?
The Affordable Care Act (ACA) is a federal healthcare reform law that was signed into law in 2010. It’s formally known as the Patient Protection and Affordable Care Act, and popularly referred to as Obamacare.
There are three primary goals of the ACA:
- Expand health insurance coverage to as many people as possible by offering premium tax credits, cost-sharing reductions to lower costs for lower-income individuals and families, instituting the Health Insurance Marketplace, and mandating coverage by large employers
- Expand Medicaid and Medicare to cover adults within a certain range of the federal poverty level (FPL)
- Support medical care delivery methods
The law places a penalty on applicable large employers (also referred to as ALEs) that do not offer health insurance to their employees.
In order to assist small business needs, the ACA created the Small Business Health Options Program (SHOP) to provide employers with 50 and fewer full-time or full-time equivalent employees with health insurance options.
The Health Insurance Marketplace is another way for individuals to seek coverage. Each year millions of Americans sign up for coverage through the Marketplace during the open enrollment period (OEP). When an individual signs up for coverage through the Marketplace, they are eligible for subsidies via tax credits, which we’ll cover later on.
The ACA also expanded Medicaid eligibility, prohibited insurance companies from raising prices or denying healthcare for those with pre-existing conditions, and mandated all Americans obtain health insurance.
Requirements for employers
The ACA has changed how employers buy and offer health insurance coverage to their employees. There are a number of important topics for employers to keep in mind with regards to their employees, the coverage they must offer, and the tax credits and penalties involved in these ACA requirements.
Specifically, we will cover the following:
- Small vs midsize vs large employer categories
- Employer requirements for health insurance options
- Tax credits
An applicable large employer (ALE) is defined by the ACA as an employer with 50 or more full-time or full-time-equivalent employees. ALEs must offer affordable health insurance options to their employees under the ACA, or they’ll have to pay a hefty fine, often charged per employee, when they file their taxes. But there are other categories of employer to be aware of.
There are three categories of business sizes according to the ACA:
- Small employer: Less than 50 employees
- Mid-size employer: 50-99 employees
- Large-size employer: 100+ employees
Small employers are not required by the ACA to offer or provide health insurance coverage. Instead, if a small business with fewer than 25 employees provides coverage, that business might qualify for a small business tax credit of up to 50% to offset insurance costs.
Any employer with 50+ employees must follow the requirement to offer and provide coverage.
Employer requirements for coverage options
Employers must abide by the following rules set by the ACA regarding the healthcare coverage they offer their employees:
- Grant notice of health insurance options and how to take advantage of them to employees. This includes helping employees find coverage through the Marketplace.
- Pay $2,000 per full-time employee that is not provided health insurance coverage.
- Pay up to $3,000 per employee who receives a tax credit in the Marketplace, for each employee that is not offered affordable coverage. If insurance that covers at least 60% of costs is not offered, and the employee is receiving tax credits from the Marketplace instead, the employer will be fined up to $3,000 per employee.
An advanced premium tax credit is a federal tax credit for individuals who enroll in health insurance coverage independently through the Marketplace. The credit reduces the amount they have to pay upfront for coverage (otherwise known as premiums).
These tax credits differ from regular tax credits, which need to be applied to the tax liability of the taxpayer, and either refunded or used as a way to reduce liability. Instead, the tax credit is income based. If the individual makes a certain amount higher than the federal poverty level per year, they will receive a smaller credit, and if they make less, they will receive larger credits and a larger discount on their premiums.
- At or above 400% FPL is generally the cutoff, but those at or above this amount may still qualify for premium tax credits
- At or below 150% FPL individuals are qualified to enroll in Marketplace coverage via a Special Enrollment Period
- Most households between 100% and 400% FPL are subsidized
The tax credit is a direct payment to the individual, so if someone receives it, they do not have to pay the full amount of their monthly premium.
The process of providing full-time employees with the correct essential coverage so as to avoid penalties can get tricky. Here, we will break down the penalties outlined by the ACA and describe how to follow the rules completely in order to avoid all fees and penalties that can occur:
- Section 4980H(a) – “The A penalty”
- Section 4980H(b) – “The B penalty”
The A penalty occurs when:
- The ALE doesn’t offer the minimum coverage necessary for at least 95% of the full-time or full-time-equivalent employees in any given calendar month, and
- At least one full-time employee gets a premium tax credit in seeking coverage through the Marketplace
The penalty is waived for the first 30 full-time employees, which is defined as those who average 30+ hours in a work week.
The cost of the A penalty in 2020 was $214.17/month per employee, minus the first 30 employees. That’s $2,570 per year, per employee. In 2021, the penalty increased to $225/month per employee, adding up to a $2,700 penalty annually, per employee.
The B penalty occurs when:
- At least 95% of full-time employees are offered coverage, but the options given are not of minimum essential coverage, meaning that they are not considered affordable options
- The employee instead finds subsidized coverage through the Marketplace
The cost of the B penalty in 2020 was $321.67/month per full-time employee. This is $3,860 per year. Again, that employee must be receiving subsidized coverage through the Marketplace for this penalty to occur. In 2021, the cost of the B penalty rose to 338.33/month, or $4,060/year.
ACA Reporting Requirements
When it comes to the logistics of following the ACA, there are only a few requirements and things to keep in mind when moving forward in the process. The following are required for reporting:
- Required Forms
- Thresholds for Affordability
To comply with the ACA reporting requirements, ALEs must fill out:
- Form 1095-C
- Form 1094-C
- Employee’s W-2 forms with the value of the health care plan
The first two forms are completed with the IRS in order to determine the employer’s shared responsibility payment. Employees must then receivea copy of the 1095-C.
Thresholds for Affordability
Because the employer does not have access to the household income of their employees, there are other ways to determine what an affordable plan looks like for a majority of their employees. After all, the ACA requires that the healthcare offered by employers is “affordable”. Affordability of health plans are determined based on three factors:
- W-2 wages
- Rate of pay by employer
- Federal poverty level
Once the affordability is determined, an employer must also stay informed of when the required forms and paperwork are due.
Typically, deadlines for reporting data pertaining to the ACA come around at the beginning of a year. Each state has slightly different requirements, but the deadlines typically range from the end of January to the end of April. It’s important to know your specific state deadlines to ensure you stay ahead of the curve and avoid penalties wherever possible.
Understanding the ACA
Employers need to understand what the Affordable Care Act does and requires in order to follow it correctly and avoid penalties. The Affordable Care Act is in place to spread health care coverage to as many Americans as possible, whether they are full-time equivalent, part-time self-employed, or those at federal poverty level. By following it correctly, applicable large employers can ensure affordable and adequate coverage to full-time employees without worrying about extra fees.