Several provisions of the Affordable Care Act (“ACA”) have significant implications for employers of all different sizes. As these begin to take effect, though sometimes subject to postponement, it is time for employers to become familiar with them.

Below are some of the essential points of the ACA for employers to know. Before delving into them, however, it is important to understand the ACA’s concept of “Full-Time” or “Full-Time Equivalent” employee (“FTE employee”), which is defined as one who works on average 30 hours or more per week. Part-time employees are included in this calculation, as the ACA requires employers to aggregate the hours worked by part-time employees, and divide that number by 30 hours. For example, an employer with four part-time employees who each work 25 hours per week would yield three FTE employees in addition to those working full time (4 employees x 25 hours = 100 hours / 30 hours = 3.33 or 3 FTE employees (always rounded down)).  Seasonal employees (those working fewer than 120 days per year) are excluded from this calculation.

For affiliated companies under common control, the calculation of FTE employees is aggregated for all of them. As indicated below, ACA applies variously according to the size of the employer, as determined by the number of FTE employees. 

For Employers With 50 or More FTE Employees

Employers with 50 or more FTE employees (i.e., “large employers”) are required under the ACA to provide health insurance to all of their full-time employees that is of “minimum value” and “affordable,” or risk paying a fee. (Note that, although the ACA aggregates part-time employees to determine the number of FTE employees in a company, a large employer is only required to provide health insurance to its full-time employees).

The “minimum value” standard is met if an employer health insurance plan covers, on average, at least 60% of the plan’s total cost of incurred benefits. The “affordable” test is met if the employee’s share of self-only – not family – overage costs no more than 9.5% of the employee’s annual household income. Because household income can be difficult for employers to determine, the employer may assume that coverage is “affordable” under the ACA if the cost to the employee of a self-only plan is not more than 9.5% of his or her wages as reported on Box 1 of the employee’s W-2 form.

When large employers fail to meet these two requirements, they are assessed a fee known as the “employer shared responsibility payment.” There are two scenarios in which an employer will be liable for this payment, each of which is initially triggered by a full-time employee making an independent application for health insurance on a government exchange and qualifying there for a subsidy called a “premium tax credit.”

In the first scenario, this triggering event occurs within a large company that does not offer coverage to at least 95% of its full-time employees (and their dependents). In the second scenario, this triggering event occurs within a large company offering a health plan that fails either the “minimum value” test or the “affordable” test.

The level of payment charged to the employer will depend upon which scenario applies.

In the first scenario, where an employer does not offer coverage at all, the employer’s shared responsibility payment would equal $2,000 per year multiplied by the number of full-time employees employed in excess of 30 FTE employees.

In the second scenario, where the large employer simply fails to provide minimum value or affordable insurance to its full-time employees and at least one of them qualifies for a premium tax credit, the penalty would equal $3,000 per year for each full-time employee that sought, and qualified for, the premium tax credit.

It is important to remember these coverage requirements apply only to the employer’s full-time employees. No penalty will be assessed against an employer where only part-time employees qualify for a premium tax credit. However, recent government regulations have postponed the date for employer compliance, such that employers with 50-99 FTE employees will have until January 1, 2016 to provide all of their full-time employees with affordable and adequate coverage, while employers with 100 or more employees must provide such coverage to at least 70% of their full-time employees in 2015, and at least 95% in 2016. Also, where an employer provides coverage that meets the minimum value and affordability tests, but the employee rejects it, no payment is owed. No payment is owed either where the full-time employee received coverage from an alternative source other than from the federal exchange, such as through the employee’s spouse. By contrast, payment will be charged to an employer that fails to extend coverage to the full-time employee dependents up to age 26, though coverage need not be offered to spouses. Finally, employers should note that the cost of providing coverage is tax deductible by the employer, whereas, employer-shared responsibility payments are not. 

For Employers With Fewer Than 50 FTE Employees

Small businesses – those having fewer than 50 FTE employees – are exempt from the large employer requirements. However, small businesses may participate in the Small Business Health Options Program (“SHOP”), which is a forum through which small businesses can shop for and offer qualified health plans to their employees.

To participate in SHOP, a small business must: (i) have one common law employee (as defined by the IRS) that is not the business owner or sole proprietor or his/her spouse; (ii) seek SHOP coverage in the state where the principal place of business is located, or offer coverage to each eligible employee through the SHOP Marketplace account serving that employee’s primary worksite; and (iii) offer coverage to all of its full-time employees.

Employers may enroll in SHOP on a rolling monthly basis. The deadline is always the 15th of the month for coverage to be effective on the 1st of the following month.  However, due to the problems associated with the government’s website,, online enrollment will not be available until November 2014. Employers that wish to enroll their employees in SHOP coverage for 2014 can do so through “direct enrollment” with an agent, broker or insurer offering a certified SHOP plan.

Enrollment in various SHOP marketplaces varies from state to state. For instance, Maryland and the District of Columbia have each developed their own SHOPs, while others may adopt the federally facilitated SHOP. Most states (including Maryland, DC, Virginia, and Pennsylvania) require at least 70% of an employer’s eligible employees to enroll in the plan(s) offered by the employer in order for the employer to participate in the SHOP Marketplace at any point during the year. Finally, in addition to state-specific SHOPs, the ACA authorizes multi-state plans enabling families and small businesses spread out over more than one state to select a health plan from the same health insurance issuer.

For Employees With Fewer Than 25 FTE Employees 

In addition to the opportunity to participate in SHOP, smaller businesses – those having fewer than 25 FTE employees – may qualify for the federal Small Business Health Care Tax Credit to help offset costs. To be eligible, the business must have average annual wages below $50,000 and contribute 50% or more toward employee’s self-only premium costs. Additionally, to take advantage of the credit, smaller businesses must buy coverage through one of the SHOP exchanges. Starting in 2014, the tax credit is worth up to 50% of an employer’s contributions to premiums for covering its employees and their families. Some states may also offer add
itional tax credits.

For Sole-Proprietors 

The government considers sole-proprietorships to be individuals, rather than employers.  To become an “employer,” an individual must employ at least one W-2 employee. Therefore, the hiring of independent contractors is insufficient to elevate sole proprietors to “employer” status, meaning that sole-proprietors are ineligible to obtain coverage through SHOP. Moreover, as “individuals,” sole-proprietors are subject to the “individual mandate,” which requires that individuals obtain health insurance or pay a tax.

The tax for those who choose to forego health insurance is based on household income. The annual tax is scheduled to be phased-in: for 2014, at $95 or 1% of income, whichever is higher; for 2015, at $325 or 2% of income, whichever is higher; and for 2016, $695 or 2.5% of income, whichever is higher.

Beginning in 2017, the penalties will be increased according to the cost-of-living adjustment.  Sole-proprietors can purchase coverage through health insurance exchanges.

For more information please contact Carolyn Mech at 410-583-2400 or