Employer Mandate
Summary Definition: A provision in the Affordable Care Act (ACA) that requires employers with 50 or more full-time employees to provide minimum essential health coverage at a defined affordable rate.
What is the Employer Mandate?
The Affordable Care Act (ACA) employer mandate requires Applicable Large Employers (ALEs) to provide full-time employees and their dependents with affordable minimum essential health coverage.
Those who don’t provide coverage, or verify their compliance by submitting Forms 1094-C and 1095-C, must pay a penalty to the Internal Revenue Service (IRS) in the form of an Employer Shared Responsibility Payment (ESRP).
Also known as the “pay or play provision,” the purpose of the mandate is to ensure employers with larger workforces provide adequate healthcare coverage to their workers, or contribute to public healthcare subsidies via their ESRP payment.
Applicable Large Employers (ALEs)
An ALE is an employer who on average has at least 50 full-time employees, full-time equivalent employees, or a mix of the two during the prior calendar year. The IRS determines an organization’s status each year, and that determination is based on the average size of the employer’s workforce from the prior year. ALEs are also subject to additional IRS reporting requirements regarding the coverage they provide.
Key Takeaways
- The employer mandate requires large employers to provide full-time employees and their dependents with minimum essential coverage that’s affordable and has a minimum value.
- To meet this requirement:
- A 2025 calendar year plan's employee-only offering must pay for at least 60% of the plan’s total benefit costs (e.g., copays, deductibles, etc.) and not exceed 9.02% of the employee’s total household income.
- No employee can be eligible for a Health Insurance Marketplace premium tax credit
- Large employers who don’t meet this requirement will face one of two types of payments to the IRS.
ACA Employer Mandate Requirements
To avoid paying the IRS, ALEs must provide minimum essential coverage that’s deemed affordable.
What is Minimum Essential Coverage?
Minimum essential coverage must provide a minimum value to employees by covering at least 60% of the total cost of the plan’s benefits (e.g., copays, deductibles, etc.) while giving substantial coverage of inpatient hospital and physician services.
What is Considered Affordable?
For 2025 calendar year plans to be affordable, its employee-only option can’t exceed 9.02% of an employee's total household income.
Since it’s impossible for an employer to know the total household income for every employee, the IRS allows the use of safe harbors when calculating affordability:
- Form W-2 Wages
- Federal Poverty Line
- Rate of Pay
Premium Tax Credits (PTCs)
PTCs are refundable tax credits that eligible individuals can use to afford health insurance purchased through the ACA’s Health Insurance Marketplace. The amount of a single credit varies based on the economic status of the individual receiving it.
If an ALE has employees receiving PTCs, they could still owe a payment to the IRS under the Employer Mandate even if they’re already providing affordable minimum value coverage to 95% of their employees and the employees’ dependents (i.e., Payment Type 1).
Learn More: ACA Compliance Guide for Employers
Employer Mandate Payment Calculations
There are two types of payments an ALE can owe the IRS. Note that employers can’t be subject to both payments simultaneously, regardless of their decisions towards providing affordable coverage. Additionally, to trigger either violation, a full time employee enrolled in employer's plan must be eligible for and/or receive a premium tax credit to a healthcare marketplace.
| Payment Type | Applies To | Calculation |
|---|---|---|
| 4980H(a): Failing to Offer Affordable Minimum Essential Coverage | ALEs who don’t offer coverage or offer it to less than 95% of their full-time employees. | $2,970 for each full time employee (minus the first 30 full time employees). |
| 4980H(b): Failing to Offer Affordable Minimum Essential Coverage with Minimum Value |
ALEs who don't offer either "affordable" coverage or coverage of "a minimum value". Note: This payment is calculated each month there's a violation and employers must pay the lesser of the two amounts. |
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Reference the IRS' Shared Responsibility Provisions for complete details. This material is for informational purposes only and shouldn't be solely relied on for tax, accounting, or legal advice.
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