MilesToPass

ACA individual mandate and employer shared responsibility

Lesson 86 of 105 · All lessons · Up next: Individual and group long-term care insurance →

Two halves of shared responsibility

The Affordable Care Act (ACA) asked both individuals and larger employers to share responsibility for health coverage. Both rules sit in the Internal Revenue Code and are enforced by the IRS:

  • the individual mandate, 26 U.S.C. § 5000A, requires individuals to keep minimum essential coverage or owe a shared responsibility payment; and
  • the employer mandate, 26 U.S.C. § 4980H, requires an applicable large employer to offer adequate coverage to its full-time employees or risk an assessable payment.
A two-column diagram titled ACA shared responsibility. The left column, in blue, is the individual mandate under 26 U.S.C. section 5000A. Its first box says keep minimum essential coverage every month, for yourself and your dependents. The second box lists the exemptions: unaffordable coverage, income below the filing threshold, membership in an Indian tribe, a coverage gap under three months, hardship, and people outside the mandate such as religious objectors, incarcerated people and those not lawfully present. The last box, in red, says the federal penalty has been zero dollars since 2019 under the Tax Cuts and Jobs Act of 2017. The right column, in green, is the employer mandate under 26 U.S.C. section 4980H. Its first box says a large employer has 50 or more full-time employees including full-time equivalents, and full-time means 30 or more hours a week. Below it, a yellow trigger box says the trigger is a full-time employee getting a premium tax credit on the exchange. Two lines lead from the trigger to two payment boxes. Payment A, no offer: 2,000 dollars a year times all full-time employees minus 30. Payment B, weak offer: 3,000 dollars a year times each subsidized employee only, capped at payment A. A footnote says these are base statutory amounts, indexed yearly and not deductible, and that the individual coverage duty remains with its penalty zeroed while the employer side is still enforced.
The two ACA shared responsibility rules: individuals (penalty now $0) and large employers (payments (a) and (b)).

The individual mandate

For every month beginning after 2013, an applicable individual must make sure that he or she, and any dependent who is also an applicable individual, is covered by minimum essential coverage (MEC).

What counts as MEC:

  • Government programs: Medicare Part A, Medicaid, CHIP, TRICARE, VA health care and Peace Corps coverage
  • Eligible employer-sponsored plans: group health plans or group coverage an employer offers, including governmental plans
  • Individual-market coverage, bought on or off the exchange
  • Grandfathered health plans
  • Other coverage HHS recognizes, such as a state high-risk pool

Excepted benefits are not MEC. Accident-only or disability income coverage never counts, and stand-alone dental, vision, long-term care, specified-disease, hospital indemnity and Medicare supplement policies do not count when sold as separate policies.

Who is outside the mandate altogether. A person is not an applicable individual for a month if he or she holds a religious conscience exemption, is a member of a qualifying health care sharing ministry, is not lawfully present in the United States, or is incarcerated (other than while awaiting disposition of charges). People living abroad and bona fide residents of U.S. territories are treated as having MEC.

Exemptions from the payment. No payment applies to a month when the person:

  • could not afford coverage, because the required contribution exceeded 8 percent of household income (a figure indexed every year);
  • had household income below the tax-filing threshold;
  • was a member of an Indian tribe;
  • was in a short coverage gap of less than 3 months (only the first such gap in a year qualifies); or
  • received an HHS hardship exemption.

The penalty, then and now. The payment is reported on the federal income tax return. A taxpayer owes it for his or her dependents, and spouses filing jointly are jointly liable. As enacted, the monthly amount was one-twelfth of the greater of a flat dollar amount per person or a percentage of household income above the filing threshold, and the total could never exceed the national average premium for a bronze plan. The Tax Cuts and Jobs Act of 2017 reduced both the flat amount and the percentage to zero beginning in 2019. The coverage requirement is still in the Code, but the federal penalty is now $0. A handful of states have since enacted their own individual mandates with state tax penalties.

Even when the penalty was in force, enforcement was deliberately weak: no criminal prosecution, and no liens or levies on property for failure to pay.

The employer mandate

Applicable large employer (ALE). An employer is an ALE for a calendar year if it employed an average of at least 50 full-time employees on business days during the preceding calendar year. Key counting rules:

  • A full-time employee averages at least 30 hours of service per week.
  • Full-time equivalents count toward the 50: add up the month's hours of all part-time employees and divide by 120.
  • Related companies treated as one employer under the controlled-group rules are counted together.
  • Seasonal exception: an employer is not an ALE if it exceeded 50 full-time employees for 120 days or fewer and the excess workers were seasonal.
  • A new employer is measured by the workforce it reasonably expects in the current year.
  • Employees with TRICARE or VA coverage are not counted when testing for ALE status.

Employers below 50 owe nothing under § 4980H, whether or not they offer coverage.

The trigger. No employer payment arises unless at least one full-time employee enrolls in an exchange plan and receives a premium tax credit or cost-sharing reduction. An employee generally qualifies for that help only if the employer made no offer, or the offer was unaffordable or did not provide minimum value.

Payment (a): no offer. If an ALE fails to offer MEC to its full-time employees and their dependents (in practice, to at least 95 percent of them), and one full-time employee gets subsidized exchange coverage, the ALE owes the applicable payment amount, $2,000 a year (one-twelfth per month), times all of its full-time employees minus the first 30. Because one subsidized employee triggers a payment measured on the whole workforce, it is nicknamed the "sledgehammer."

Payment (b): an inadequate offer. If an ALE does offer coverage but a full-time employee still gets a premium tax credit, because the coverage was unaffordable (the employee's self-only share exceeded about 9.5 percent of household income, indexed) or did not pay at least 60 percent of covered costs, the ALE owes $3,000 a year for each such subsidized employee. That total can never exceed what payment (a) would have been.

Administration. Both dollar figures are indexed for years after 2014, rounding down to a multiple of $10. The payment is not tax deductible. The IRS assesses it on notice and demand and must give the employer at least 90 days from its first letter proposing an assessment to respond. ALEs report their offers to the IRS and to employees on Forms 1094-C and 1095-C.

Exam traps

  • The individual mandate still exists, but its federal penalty is $0 since 2019. The employer mandate is still enforced.
  • 50 full-time employees (including FTEs) makes an ALE; 30 hours a week makes a full-time employee; the first 30 employees are subtracted under payment (a). Do not mix up the two 30s.
  • The employer payment is triggered by a subsidized employee, not by an employee who simply declines coverage.
  • Payment (b) is per subsidized employee; payment (a) is per full-time employee, subsidized or not.

Key terms

Sample questions

Under the Affordable Care Act's individual mandate, how often must an applicable individual be covered by minimum essential coverage?

  • Only for the month in which the individual files a federal tax return
  • For at least six months of each calendar year
  • For each month, for the individual and any dependent who is also an applicable individual
  • Only during the exchange's annual open enrollment period
Preview

This is a preview. The full lesson and question set require an active plan.

See pricing →

See where this fits: New York exam outline and topic weights.