ACA compliance

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.

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.