If a company falls out of ACA compliance, the penalties for it can be crippling. To avoid staggering fines, employers must carefully follow all ACA regulations – but the complexity of the ACA makes this job easier said than done.
With over 4.4 billion enforcement assessment letters sent to employers in the first year that the ACA was implemented, staying in step with ACA employer requirements may seem impossible.
Here at Combined, we understand the challenges of ACA compliance and have helped a great number of employers avoid expensive violation penalties. Our ACA and benefits specialists can teach you tricks of the trade, so you can too.
In this article, we will take an in-depth look at ACA employer requirements involving:
ALE status
MEC criteria
Year-end reporting
By the end, you will learn the 3 best ways to foolproof your ACA compliance practices.
A brief ACA overview – Why it matters to your business
The Affordable Care Act (ACA) was instituted in March 2010 in order to reform the American health care system. The goal of this comprehensive law is to make affordable health care available to more people.
The ACA attempts this by:
Requiring Applicable Large Employers (ALE) to provide their full-time employees access to Minimum Essential Coverage (MEC) that is both affordable and minimum value.
Subsidizing the cost of individual coverage for those who are ineligible to receive it from their employer.
To do this, the ACA has strict employer requirements that are even more strictly enforced.
This means major penalties for noncompliance.
The 3 best practices to make sure you are always ACA compliant
No employer wants to receive an ACA enforcement letter – less yet pay the steep price for having made compliance mistakes.
These 3 best practices can make sure you don’t have to.
Best Practice #1 – Determine Applicable Large Employer (ALE) status
Under the ACA employer shared responsibility mandate, ALEs must offer MEC that is affordable and minimum value to at least 95% of full-time employees.
By correctly determining ALE status, you will know whether this mandate applies to your business.
Failure to correctly determine ALE status will result in a penalty.
Is your business considered an ALE?
The ACA offers this guideline for ALE determination:
To qualify as an ALE, an employer must have an average of 50 full-time employees including full-time equivalent employees during the previous calendar year.
This number is calculated using full-time equivalents (FTEs):
FTEs are a measure of the total number of full-time hours worked among all employees.
How to calculate if your business is an ALE?
You can calculate FTEs and determine your ALE status using the following:
Full-time employee – an employee that works an average of at least 30 hours per week, 130 hours per month, or 1560 hours per year.
1 full-time employee equates to 1 FTE.
So, if you only employ 20 full-time employees, you would report 20 FTEs.
Part-time/ Variable employee – an employee that does not work an average of at least 30 hours per week, 130 hours per month, or 1560 hours per year.
Part-time/ Variable employee – an employee that does not work an average of at least 30 hours per week, 130 hours per month, or 1560 hours per year.1 part-time/ variable employee, however, equates to a partial FTE depending on how many hours on average that they work.
In order to find your FTE count for part-time/ variable employees, you add up the total number of hours worked by all part-time/ variable employees in one month and divide it by the 130 hours per month needed for full-time status.
For example:
If you employ 20 part-time/ variable employees who each work 100 hours per month, your calculation would look like this:
20 part-time/ variable employees X 100 hours per month = 2000 total hours
2000 total hours/ 130 full-time hours = 15.38 FTEs
So, if you only employ 20 part-time/ variable employees, you would report 15.38 FTEs
Note: for the purpose of determining ALE status for the year, this FTE count has to be calculated monthly and averaged.
FTEs - calculated by totaling your FTE count for full-time and part-time/ variable employees.
For example:
If you employ 20 full-time employees and 20 part-time/ variable employees that each work 100 hours per month, you would report the combined FTE total of 35.38 FTEs.
More complex calculations can be made easy using a tool like this FTE Employee Calculator.
In order to determine ALE status, this timeline is used:
The number of FTEs from the previous calendar year contributes to an employer’s current ALE status. This means that ACA reporting requires you to correctly determine and report your ALE status every year.
Your business qualifies as a current ALE if the number of FTEs totals 50 or more for the previous calendar year.
Best Practice #2 – Offer Minimum Essential Coverage (MEC) to full-time employees
Under the ACA employer shared responsibility mandate, ALEs must offer MEC that is affordable and minimum value to at least 95% of full-time employees.
Failure to offer coverage or offering coverage that does not meet affordability and minimum value standards will result in a penalty.
Here is how you can measure whether the coverage you offer meets these requirements.
Do you offer the right coverage plan?
The MEC you offer must be:
- Affordable
- Minimum Value
The ACA offers the following guidelines for coverage criteria.
Is your coverage affordable?
The employee contribution to their health care plan premium determines whether coverage is affordable.
To meet this requirement for 2023, the employee contribution cannot exceed 9.12% of their annual household income.
This means that to be considered affordable, the lowest cost coverage you offer employees must fall at or below this contribution percentage.
3 Safe Harbors to prove affordability
The IRS provides 3 ways or Safe Harbors that you can use to calculate and prove the affordability of the coverage you offer:
1. Rate of Pay
This Safe Harbor uses an employee’s hourly rate of pay or monthly salary to determine affordability.
To calculate affordability using this method for an hourly employee:
Multiply their hourly rate of pay by the 130 minimum number of hours of work they need to complete in one month to be considered a full-time employee then multiply this product by the 9.12% maximum contribution.
For coverage to qualify as affordable, this is their maximum monthly contribution.
For example:
If an employee’s hourly rate of pay is $25/ hour, your calculation would look like this:
$25/ hour X 130 hours = $3,250 X 9.12% = $296.40 is their maximum monthly contribution.
To calculate affordability using this method for a salaried employee:
Multiply their monthly salary by the 9.12% maximum contribution.
For coverage to qualify as affordable, this is their maximum monthly contribution.
For example:
If an employee’s monthly salary is $3000, your calculation would look like this:
$3,000 X 9.12% = $273.60 is their maximum monthly contribution.
2. W-2
This Safe Harbor uses an employee’s gross income, from Box 1 of their W-2, to determine affordability. The W-2 Safe Harbor uses the gross income from the current year, so coverage affordability can’t be assessed until the year is over.
To calculate affordability using this method:
Multiply their annual salary by the 9.12% maximum contribution then divide this product by 12 months.
For coverage to qualify as affordable, this is their maximum monthly contribution.
For example:
If an employee’s annual salary is $60,000, your calculation would look like this:
$60,000 X 9.12% = $5,471/ 12 months = $455.92 is their maximum monthly contribution
3. Federal Poverty Line (FPL)
This Safe Harbor uses the FPL from the previous calendar year to determine affordability.
To calculate affordability using this method:
Multiply the FPL from the previous calendar year by the 9.12% maximum contribution then divide this product by 12 months.
For coverage to qualify as affordable, this is an employee’s maximum monthly contribution.
For example:
If the FPL from the previous year was $12,000, your calculation would look like this:
$12,000 X 9.12% = $1,094.40/ 12 months = $91.20 is their maximum monthly contribution
For each of these Safe Harbor calculations, any value above the maximum contribution would not be considered affordable coverage and would not meet ACA coverage requirements.
Is your coverage minimum value?
In order to meet this requirement, you must offer employees a health care plan that covers at least 60% of the average total covered benefits cost. This plan must also provide significant coverage for inpatient and physician services.
For example:
If an employee receives covered medical services that amount to $10,000, to meet minimum value the plan must pay at least $6,000 of this expense.
Best Practice #3 – Properly report health care coverage information to the IRS
All ALEs must follow ACA requirements when filing health care coverage information. If you fail to follow these guidelines, it will result in enforcement penalties.
The ACA requires that all ALEs use IRS Form 1094-C and Form 1095-C to file health care information for all eligible employees:
- Form 1094-C must be provided only to the IRS. It contains employer information including the employer identification number, the number of employees, and the number of 1095-C forms being filed.
- Form 1095-C must be provided to the IRS for each eligible employee. It details coverage information including the coverage offered, the lowest cost premium offered, and the number of months during which the coverage was offered to an eligible employee.
The employer must also provide Form 1095-C to all eligible employees by an IRS-specified deadline – for the 2022 filing year the deadline is March 2nd, 2023.
3 rules for reporting health care coverage
On-time reporting
The IRS requires that an ALE file by March 31st each year. The following penalties are assessed for late filing for 2023:
- Complete and accurate filing (submitted on time by March 31st) - $0 penalty
- Complete and accurate filing (not more than 30 days late) - $50 penalty per return with a $588,500 annual maximum
- Complete and accurate filing (submitted after 30 days but before August 1st) - $110 penalty per return with a $1,766,000 annual maximum
- Complete and accurate filing (submitted after August 1st) - $290 penalty per return with a $3,532,500 annual maximum
- Intentional Disregard for filing - $580 per expected return with no annual maximum
Paper vs. electronic filing
The IRS has an outlined protocol for how an ALE must file:
- ALEs with fewer than 250 employees can report on paper but, if so, the reporting deadline is February 28th instead of March 31st
- ALEs with more than 250 employees must file electronically by March 31st
Accurate reporting
The IRS ended the good faith effort relief in 2022 so it is important that reporting is accurate and on the correct forms or it will not be accepted.
Next steps to complete ACA Compliance
The ACA is unarguably complex. Trying to stay in line with so many regulations – each with its own set of conditions, deadlines, and penalties – is an involved and overwhelming task.
By reading this article, you are now equipped with the 3 best ways to simplify it.
And, with these best practices in play, you are off to a great start toward ACA compliance.
Here at Combined, our ACA and benefits specialists have helped countless employers, just like you, capitalize on this solid start and take their ACA compliance process straight to the finish – the goal of achieving complete ACA compliance.
With knowledgeable experts and capable technology at the ready, we are eager to help you meet this goal.
This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.
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