ACA Compliance: Understanding Employer Mandate Penalties for 2024 and 2025

Employers, especially Applicable Large Employers (ALEs) with 50 or more full-time equivalent employees in the previous year, are subject to crucial regulations under the Affordable Care Act (ACA) regarding healthcare coverage. It’s essential to understand these rules to avoid potential penalties.

In this blog, we will break down the key aspects of the employer mandate penalties for 2024 and 2025.

Meeting the Offer Requirement

One of the central requirements for ALEs is to provide minimum essential coverage to at least 95% of their full-time employees. Failure to meet this offer requirement can result in significant penalties. Let’s delve into the specifics:

2024 Penalties

In 2024, the penalty for failing to meet the offer requirement is set at $2,970 per full-time employee, excluding the first 30. For instance, if an employer has 200 full-time employees and doesn’t meet the offer requirement, the penalty calculation would be as follows: (200 – 30) x $2,970, totaling $509,900.

2025 Penalties

Looking ahead to 2025, this penalty decreases slightly to $2,900 per full-time employee. It’s important to note this adjustment when planning your employee coverage strategy.

Additional Penalties

Even if an employer manages to meet the 95% offer requirement, there’s a second potential penalty to consider. The coverage offered must not only encompass the minimum essential coverage but also meet specific criteria regarding value and affordability. Let’s explore this in more detail:

Affordability Criteria

In 2024, coverage is deemed affordable if an employee pays no more than 8.39% of their income for the lowest-priced plan. For 2025, this threshold increases to 9.02%. Employers should adjust their plans accordingly to ensure compliance.

Penalty for Unaffordable Coverage

If, in 2024, a full-time employee is not offered an affordable plan with minimum value and chooses instead to enroll in a subsidized Marketplace plan, a penalty of $4,460 per full-time employee applies. For 2025, this penalty decreases to $4,350 per full-time employee.

IRS Communication and Reporting

Employers subject to penalties will receive Letter 226-J from the Internal Revenue Service (IRS). This letter outlines the penalty, providing employers with an opportunity to contest it if they disagree with the IRS assessment. It’s worth noting that errors on Form 1094-C or 1095-C, used for reporting to the IRS, can lead to penalties. If a penalty arises from a reporting mistake, it can often be reduced or even eliminated by responding to Letter 226-J and addressing the error promptly.

Importance of ACA Compliance

Compliance with the Affordable Care Act (ACA) regulations is of paramount importance for employers, particularly Applicable Large Employers (ALEs). Understanding the significance of ACA compliance extends beyond avoiding penalties; it has a far-reaching impact on both employee well-being and the company’s reputation.

• Avoiding Penalties: Compliance with ACA regulations is the surest way to avoid costly penalties. By meeting the 95% offer requirement for healthcare coverage to full-time employees, employers can steer clear of substantial financial penalties imposed for non-compliance. These penalties can add up quickly and strain a company’s resources, making compliance a prudent financial decision.
• Employee Well-being: Providing healthcare coverage to employees is not just a regulatory obligation but also a means of safeguarding their well-being. Access to healthcare coverage ensures that employees can receive necessary medical care when they need it, promoting their physical and financial health. Healthy employees are more productive and engaged, contributing positively to the company’s overall success.
• Company Reputation: ACA compliance also plays a crucial role in shaping a company’s reputation. Businesses that prioritize employee benefits and adhere to healthcare regulations are viewed more favorably by potential recruits, clients, and the public. On the other hand, news of non-compliance or penalties can tarnish a company’s image, potentially affecting customer trust and shareholder confidence.

In summary, ACA compliance is not just about avoiding penalties; it’s a commitment to the well-being of employees and the preservation of a positive corporate image.

Eligibility Determination

Determining the eligibility of employees is a fundamental aspect of ACA compliance, especially when dealing with variable hour or seasonal employees. Accurate employee categorization is crucial in meeting the 95% offer requirement.

• Variable Hour and Seasonal Employees: Variable hour or seasonal employees can pose challenges when determining eligibility. These employees may have fluctuating work hours, making it necessary for employers to carefully track their hours worked. Employers must establish clear criteria for categorizing employees as full-time, part-time, or variable hour, ensuring that each group receives the appropriate healthcare coverage.
• Importance of Accurate Categorization: Accurate employee categorization is essential for meeting the 95% offer requirement. Misclassifying employees can lead to non-compliance and potential penalties. Employers must maintain meticulous records and implement robust systems for tracking and categorizing employees to avoid discrepancies.

Minimum Essential Coverage

Understanding what constitutes Minimum Essential Coverage (MEC) under the ACA is crucial for employers. MEC defines the types of healthcare plans that meet regulatory requirements, and offering these plans is central to compliance.

• Types of MEC: MEC includes various healthcare plans that provide essential benefits. These may encompass employer-sponsored group health plans, government-sponsored programs like Medicaid and Medicare, and certain individual market plans. It’s vital for employers to ensure that the coverage they provide falls within the scope of MEC to satisfy regulatory obligations.
• Emphasizing Employee Access: Offering MEC is not just about meeting regulatory requirements; it’s about ensuring that employees have access to comprehensive healthcare coverage. MEC plans are designed to cover essential healthcare services, promoting the well-being of employees and their families. Employers should prioritize providing these plans to protect their workforce.

Still Have Questions?

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