Does every business with 50 or more employees pay a penalty if it doesn’t offer ‘affordable, comprehensive’ insurance?

Q. Does every business with 50 or more employees pay a penalty if they don’t offer “affordable, comprehensive” health insurance?

A. Businesses with 50 or more full-time equivalent (FTE) employees are required to offer health insurance coverage to their full-time employees (30+ hours per week) or they risk a penalty. The employer mandate went into effect — partially — in 2015 for businesses with at least 100 FTE employees, and took effect in 2016 for those with at least 50 FTE employees.

But the penalty for not offering affordable, comprehensive coverage is only triggered if at least one of the employees obtains coverage in the exchange and receives a premium subsidy. The penalty varies depending on whether the employer doesn’t offer coverage at all, or offers coverage but it doesn’t provide minimum value and/or it isn’t affordable.

Employer doesn’t offer coverage at all

If an employer with 50 or more FTE employees doesn’t offer coverage to at least 95% of FTE employees, the potential penalty is $2,880 per full-time employee in 2023 (that amount started at $2,000, but it’s indexed for inflation; see question 55 in this IRS FAQ), although the first 30 employees aren’t counted in the calculation. So if an employer has 65 FTE employees, doesn’t offer coverage, and at least one employee gets coverage in the exchange with a premium subsidy, the employer would owe a $100,800 penalty for 2023. The calculation is: (65-30) x 2,880 = 100,800.

But if a business pays its workers wages that are high enough to ensure every employee’s household income would be too high to qualify for subsidies, there would be no penalty, since none of the workers would qualify for subsidies in the exchange. Of course, that’s rare, since large, high-wage employers almost always offer comprehensive health insurance coverage. And it’s even rarer from 2021 through 2025, since the American Rescue Plan (ARP) eliminated the income cap for subsidy eligibility (extended through 2025 by the Inflation Reduction Act). That doesn’t mean that the highest earners get subsidies now, but it does mean that households with income above 400% of the poverty level may qualify for subsidies — depending on the cost of the benchmark plan in their area — whereas that wasn’t the case pre-ARP.

Similarly, if none of the employees obtain coverage in the exchange despite being eligible for subsidies, the penalty would not be triggered. But that’s probably also very unlikely, given how much publicity the ACA has received for the last several years.

Coverage unaffordable, or too skimpy

If an employer does offer coverage but it’s not affordable and/or doesn’t offer minimum value, the employer would face a penalty if any full-time employees end up getting a subsidy in the exchange.

• An employer-sponsored plan is considered unaffordable if the employee contribution for premiums is more than 9.12% of household income in 2023 for employee-only coverage (note that employers generally use affordability safe harbors, since they typically don’t know what their employees’ household income is).
• Although the “family glitch” has been fixed as of 2023, allowing some employees’ family members to be newly eligible for subsidies in the exchange, that did not change anything about the requirements for employers. Large employers are still only required to ensure that the employee’s self-only coverage is affordable. They are not required to pay any of the portion of the cost to cover family members (although most employers do contribute to the family premiums).
• To provide minimum value, an employer’s plan has to cover at least 60% of average expected medical costs, and provide “substantial coverage” for inpatient care and physician services.

If an employer’s plan is unaffordable and/or doesn’t provide minimum value, the employer would face the lesser of two penalty options: $4,320 per employee receiving premium subsidies in the exchange (this started at $3,000, but has also been indexed for inflation), OR the $2,880 per full-time employee (minus the first 30) penalty described above.

Consider a business that has 120 full-time employees and offers coverage, but it’s either not affordable and/or doesn’t provide minimum value: If 70 employees get subsidies in the exchange in 2023, the employer would pay a penalty of $259,200 for the year ((120-30) x 2,880 = 259,200), since that’s smaller than the alternative penalty calculation (70 x 4,320, which would be $302,400).

But if only 20 of the employees get subsidized coverage in the exchange, the employer would pay $86,400 for the year (20 x 4,320 = 86,400), since that’s smaller than the alternate calculation of (120-30) x 2,880, which would be $259,200.

Individual mandate penalty was eliminated, but employer mandate penalty remains in place

Although the GOP tax bill that was enacted in late 2017 repealed the individual mandate penalty starting in 2019, it did not make any changes to the employer mandate. Large employers that don’t offer coverage, or that offer coverage that doesn’t provide minimum value and/or isn’t affordable, continue to face penalties if their employees obtain subsidized coverage in the exchange.

And as noted above, the “family glitch” fix did not change anything about the employer mandate requirements. Some employees’ family members are newly eligible for subsidies in the exchange as of 2023 under the new rules. But nothing has changed about what’s required of large employers: They still just have to ensure that they offer affordable, minimum value coverage to their full-time employees. They can choose to also offer affordable family coverage, but they are not required to do so.

Read answers to other questions about health reform, and penalties, and small business.

Louise Norris is an individual health insurance broker who has been writing about health insurance and health reform since 2006. She has written dozens of opinions and educational pieces about the Affordable Care Act for healthinsurance.org.