ACA compliance requirements: What employers need to know

The Affordable Care Act (ACA) altered the health insurance landscape for Americans and their employers. Since 2010, the ACA has reduced the number of uninsured Americans by 80%. Despite the law’s many complexities, we can all agree it’s been a positive change.

One of the reasons so many people now have access to health insurance is the employer mandate, a set of rules that requires certain businesses to provide health coverage to their full-time employees. In addition to knowing your obligations regarding coverage, you need to understand if your business is required to submit any ACA reporting—or potentially risk steep fines from the IRS and state tax authorities. That’s why it’s crucial to track employee data accurately.

Keep reading, and we’ll cover everything you need to know about the ACA, including how to stay compliant to avoid penalties—and how Rippling can help.

What is ACA compliance?

The Affordable Care Act, also known as the ACA or Obamacare, is the law that requires businesses with 50+ full-time employees to provide health coverage to at least 95% of their workforce or face government penalties. Businesses also have to meet other requirements like providing their employees with notice of their coverage, available benefits, and costs. But you’re not off the hook just yet! You must file proof of coverage with the IRS and applicable state agencies each tax year.

Who needs to stay ACA compliant?

Businesses that are required to be ACA compliant are known as Applicable Large Employers (ALEs). If your business averaged 50 full-time or full-time equivalent employees during one calendar year, it’s considered an ALE for the following calendar year. An employee who works 30 hours per week on average is considered full-time under the ACA.

The ACA also has rules to discourage businesses from getting around the requirements by employing only part-time workers—that’s why it looks at full-time equivalent employees and not just full-time employees. To determine how many full-time equivalent employees your business has, take the total number of hours worked by part-time employees and divide it by 30.

For example, if a business has 40 full-time employees and 20 part-time employees who work 20 hours each (20x20 = 400, 400/30 = 13), it has 53 full-time equivalent employees and qualifies as an ALE under the ACA.

There are some limited exceptions to ALE rules. For example, churches and other religious organizations are exempt from ACA provisions about providing birth control coverage, though they still need to offer health coverage to eligible employees if they meet ALE criteria.

ALEs are only required to offer health benefits to their full-time employees. Part-time workers and employees who have worked for the business for under three months are not required to receive coverage.

Companies that aren’t required to comply with the ACA can still offer health insurance coverage. Small employers can offer health insurance to help them attract and retain top talent in competitive hiring landscapes. If you decide to offer health coverage as a small employer, you’ll have some requirements to meet to stay compliant with the ACA—we’ll cover those in the next section.

With a solution like Rippling, you can streamline your ACA compliance and make it easier to provide attractive benefits packages to employees—no matter the size of your business.

ACA compliance requirements

Penalties for ACA noncompliance can be steep and vary depending on which part of the compliance requirements you violate:

• The 4980H(a) penalty, also known as the hammer penalty, is $2,880 per employee per year. The 4980H(a) penalty occurs when a business doesn't offer Minimum Essential Coverage (MEC) to at least 95% of its full-time employees. It can also occur if at least one employee obtains a Premium Tax Credit (PTC) from a state or federal ACA health exchange.
• The 4980H(b) penalty is $4,320 per employee per year. The 4980H(b) penalty occurs when a business offers healthcare coverage, but it’s unaffordable, not Minimum Value, or both—and there’s at least one employee who receives a PTC from a state or federal health exchange. 
• If you fail to distribute a Summary of Benefits Coverage to your employees, you could be fined up to $1,264 per employee. 
• If you don’t provide a Notice of Material Modification, you could incur fines up to $110 per day. 
• If you provide late or incorrect forms to employees or the IRS, you could be fined $50 per return if they’re under 30 days late—or $290 per return if you file them after August 1.

Needless to say, businesses have a lot of incentives to get things right when it comes to ACA compliance.

Large employers (50 full-time or full-time equivalent employees)

Large employers must comply with the ACA. That means meeting all the requirements below:

• Provide compliant health insurance coverage. This is what’s known as the ACA employer mandate. It requires all businesses with at least 50 full-time equivalent employees to offer health insurance to at least 95% of all their employees. The insurance plans must be affordable, provide minimum value, and meet other requirements, which we’ll cover below.
• Satisfy reporting requirements. Each year, large employers need to submit IRS Forms 1094-C and 1095-C. These documents provide the IRS with coverage information to decide whether you pass the employer mandate. You need to distribute 1095-C forms to employees by March 2. 1094-C and 1095-C forms have to be filed with the IRS by February 28 (if you're submitting them by mail). You could also file them electronically with a due date of March 31.
• Distribute notices. Employers must provide notices to all their employees in writing. Required notices include:
  • Notice of Marketplace Coverage Options. This is a general notice with information about the health insurance marketplace. It’s not an annual notice, so it must be given to employees once within 14 days of their hiring date.
  • Summary of Benefits Coverage (SBC). This outlines all the plans you offer and how much they cost. Provide an SBC to employees and their beneficiaries every plan year during open enrollment and when requested.
  • Notice of Material Modification. If you make any changes to an offered plan that would affect the content of the SBC, you must notify employees in writing at least 60 days before the changes take effect.

Large group health plans must also meet these requirements:

• 90-day maximum waiting period
• No waiting periods for pre-existing conditions
• Guarantees issue during enrollment periods
• Meets IRS affordability standards, meaning premiums don’t exceed 9.12% of the employee’s household income
• Extensive coverage for inpatient and physician services
• Meets the Minimum Value standard, meaning it covers a minimum of 60% of healthcare costs for a standard population
• No dollar limits on yearly or lifetime benefits for essential health benefits
• Covers preventative care
• Caps out-of-pocket costs for essential in-network medical care
• Allows dependents to stay on a parent’s plan until the age of 26
• Spends 85% or more of its premiums on medical costs and quality improvements (excluding self-insured plans)

Small employers (fewer than 50 full-time or full-time equivalent employees)

As a small employer, you don’t have to offer health insurance to your employees—but you must provide newly hired employees with a Notice of Marketplace Coverage Options within 14 days of their hiring date to comply with the ACA.

However, offering health benefits is a great way for small businesses to recruit and retain top talent—it helps them stand out as a great place to work. If you have fewer than 50 full-time equivalent employees and choose to offer health insurance, you’ll need to meet some ACA compliance requirements:

• Meet the standards of minimum coverage. Small group coverage doesn’t need to meet the same affordability and minimum value standards as large group coverage, but plans still need to meet ACA standards.
• Satisfy reporting requirements. Small employers don’t need to file Form 1094-C or Form 1095-C. If you provide self-insured group coverage, you’re required to file an annual return using Form 1095-B and 1094-B for each covered employee.
• Distribute notices. Notices must be given to employees in writing, including:
  • Notice of Marketplace Coverage Options, within 14 days of hire
  • Summary of Benefits Coverage (SBC), annually during open enrollment and upon request
  • Notice of Material Modification, if you make any plan changes that would affect the SBC, at least 60 days before the changes take effect

Small group coverage plans need to meet these requirements (which are the same as the requirements for individual or family coverage plans purchased directly from an insurance company):

• Covers pre-existing conditions
• Guarantees issue during open enrollment
• Guarantees issue during special enrollment periods
• Covers essential health benefits
• Allows dependents to stay on a parent’s plan until the age of 26
• Spends 80% or more of its premiums on medical costs and quality improvements 
• Determines premiums only by age, number of family members enrolling, tobacco use, and location
• Caps out-of-pocket costs for essential in-network medical care
• No yearly or lifetime dollar limits for essential health benefits

Any size employer

Regardless of how many employees you have, if you offer health insurance, there are a few more things you might need to do to stay compliant with the ACA:

• W-2 reporting. If you file 250 or more W-2s, you’ll need to report the value of the health coverage you provide your employees on their W-2s.
• PCORI fee. If you’re self-insured—meaning you collect premiums from your employees and pay for their and their dependents’ medical care—you may have to pay a Patient-Centered Outcomes Research Institute (PCORI) fee to the IRS.

FAQs about ACA compliance

What are the employer shared responsibility provisions?

The ACA’s employer shared responsibility provisions, also known as the employer mandate or the “pay or play provisions,” are the rules that apply to Applicable Large Employers (ALEs). These rules require them to provide insurance that's affordable and offers “minimum value” to full-time employees. ALEs who don’t meet the provisions must make employer shared responsibility payments to the IRS.

What are employer shared responsibility payments?

Employer shared responsibility payments (or ESRP) are the penalties companies can face for not complying with the employer shared responsibility provisions.

Note that the employer mandate only applies to ALEs. Even if you offer health insurance as a small employer, you won’t face ESRP penalties.

There are two possible ESRPs an ALE could have to pay:

• If you don't offer minimum essential coverage to at least 95% of your full-time workforce, and at least one full-time employee gets the premium tax credit for buying coverage via the health insurance marketplace, the ESRP is equal to $2,880 per employee per year—with the first 30 employees excluded.
• If you do offer coverage, but it isn’t affordable, doesn’t offer minimum value, or wasn’t offered to certain employees, the ESRP is equal to $4,320 per year for each employee who receives the premium tax credit for buying coverage through the marketplace.

What is an ACA penalty notice?

A penalty notice is issued when an ALE is found in noncompliance with the ACA. Most commonly, ALEs receive penalty notices if their Forms 1094-C or 1095-C are filed with the IRS inaccurately or if they miss the submission deadline. A penalty notice may also be sent as a notification that an ESRP payment is due for a violation—if this is the case, the penalty notice will include the assessed dollar amounts for each violation under IRS Code Section 4980H(a), (b), or both.

How do I determine a full-time employee for the employer shared responsibility provisions?

For the employer shared responsibility provisions, a full-time employee is considered someone who averages 30 hours per workweek or 130 hours per month for a calendar month.

The IRS offers two methods for determining full-time employee status:

• The monthly measurement method, where the employer determines whether the employee works at least 130 hours per month on a month-by-month basis
• The look-back measurement method, where the employer determines the employee’s status during the current period based on their hours during the preceding period

What are affordability safe harbors?

Under the ACA, employer-sponsored health plans must meet affordability standards, meaning they can’t cost employees more than a percentage of their household income. Since many employers don’t know their employees’ household incomes, they can use “safe harbor” calculations as alternative methods to determine affordability. These include W-2 wages, pay rates, and the federal poverty level.

What health plans aren’t regulated by the ACA?

Some plans aren’t subject to ACA rules. These include:

• Short-term health insurance that’s designed to cover enrollees for three months or less.
• Healthcare sharing ministries, a type of religious-based health insurance where participants share the cost of medical bills (for example, Samaritan Ministries)
• Grandfathered plans that were purchased before January 1, 2014

Does the ACA cover workplace wellness programs?

The ACA includes incentives for employers who promote wellness programs that support healthier activities and lifestyles for their employees. Employers who offer wellness programs can reduce healthcare costs for employees by up to 30% or up to 50% for programs that prevent or reduce tobacco use.

What are Medical Loss Ratio rebates?

Under the ACA, insurance providers are required to spend 80-85% of premiums on medical costs and quality improvements—not administrative costs, executive salaries, overhead, marketing, or profits. If an insurance company doesn’t meet the Medical Loss Ratio (MLR) standard in a given year, it must issue rebates to its customers. In some cases, rebates are issued to employers, who must then distribute them to their enrolled employees.

How Rippling makes ACA compliance simple

The best way to stay on top of ACA compliance is with Rippling. 

Rippling makes it easy and automatic to report your coverage information to the IRS, generate and send 1095-C forms to your employees, and track your employees’ hours. You’ll never have to worry about non-compliance for failing to offer coverage to an eligible employee.

With Rippling, you can:

• Gather relevant information about your company for reporting to the IRS.
• Generate and file 1094-C forms for your company.
• Submit reporting forms to the IRS and any relevant state agencies on time.
• Generate 1095-C forms for all eligible employees and add them to your employees’ Rippling profiles.
• Track all your compliance information, including plans that were offered, insurance-eligible employees, enrollment information, employee hours, and more—all in one place.

Rippling and its affiliates do not provide tax, accounting, or legal advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any related activities or transactions.