The Employer Shared Responsibility Final Regulations Explained

The Employer Shared Responsibility Provisions (ESRP) are a component of the Affordable Care Act (ACA). These regulations, also known as the employer mandate, require certain employers to offer qualifying health insurance to their full-time employees and their dependents. Failure to provide this coverage may result in a penalty payment to the Internal Revenue Service (IRS). This framework establishes a “pay or play” system, where employers must either offer compliant health insurance or face potential financial consequences.

Determining Applicable Large Employer Status

The first step for any business is to determine if it is an Applicable Large Employer (ALE), as only ALEs are subject to the employer mandate. An employer is an ALE if it employed an average of 50 or more full-time employees, including full-time equivalent employees, during the preceding calendar year. This calculation is performed annually and includes all types of employers, from for-profit companies to tax-exempt organizations and government entities.

The calculation process involves a specific, multi-step method. It begins by identifying full-time employees for each month of the prior year. Under the ACA, a full-time employee is defined as someone who averages at least 30 hours of service per week or 130 hours of service in a calendar month.

Next, the employer must calculate its full-time equivalent (FTE) employees. This is done by taking all the hours worked by non-full-time employees for a given month and aggregating them. The total hours for these part-time employees are then divided by 120 to determine the number of FTEs for that month; no single non-full-time employee can contribute more than 120 hours to this monthly calculation.

To find the monthly total, the number of full-time employees is added to the number of FTEs. The final step is to sum these 12 monthly totals and divide by 12 to arrive at the average number of employees for the year. If this final number is 50 or greater, the employer is considered an ALE for the current year.

Companies that have a certain level of common ownership must combine their employee counts to determine ALE status under aggregation rules in Internal Revenue Code Section 414. For example, a parent company and its subsidiary where the parent owns at least 80% of the subsidiary would be treated as a single employer. This prevents businesses from splitting into smaller entities to avoid the mandate.

Minimum Health Coverage Requirements

Once an employer is identified as an ALE, it must offer health coverage that meets specific standards to avoid penalties. The coverage must satisfy three requirements: it must be Minimum Essential Coverage (MEC), it must be affordable, and it must provide Minimum Value (MV).

The first standard, Minimum Essential Coverage, is the baseline type of health insurance that qualifies under the ACA, including most employer-sponsored plans and government-sponsored programs. To avoid the most significant potential penalty, an ALE must offer MEC to at least 95% of its full-time employees and their dependents.

The second requirement is that the coverage must be affordable. For 2025, a plan is considered affordable if the employee’s required contribution for the lowest-cost, self-only plan does not exceed 9.02% of their household income. Since employers rarely know an employee’s total household income, the IRS provides three safe harbors to test for affordability: the Form W-2 safe harbor, the Rate of Pay safe harbor, and the Federal Poverty Line safe harbor.

Finally, the offered plan must provide Minimum Value. A health plan meets the MV standard if it is designed to pay for at least 60% of the total allowed cost of benefits. This means the plan’s share of costs for services like inpatient hospital care and physician services must meet this 60% threshold. The Department of Health and Human Services provides a Minimum Value Calculator that employers can use to determine if their plan meets this standard.

Shared Responsibility Penalties

An Applicable Large Employer (ALE) that does not adhere to the coverage requirements may be subject to an Employer Shared Responsibility Payment (ESRP). No penalty is assessed unless at least one full-time employee receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace. The regulations establish two distinct penalties under Internal Revenue Code Section 4980H.

The first and more severe penalty is often called the “A” penalty or the “sledgehammer” penalty. This is triggered if an ALE fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time employees and their dependents, and at least one full-time employee obtains a premium tax credit. The penalty is based on the employer’s total number of full-time employees, after subtracting a statutory number of employees (typically the first 30). For 2025, the annualized penalty is $2,900 per employee.

The second penalty is known as the “B” penalty or the “tack hammer” penalty. This applies when an ALE offers MEC to its workforce, but the coverage offered to a specific employee is either not affordable or does not provide Minimum Value. It is triggered only for each full-time employee who rejects the employer’s offer, enrolls in a Marketplace plan, and receives a premium tax credit. For 2025, this annualized penalty is $4,350 for each employee receiving the credit. An employer will not be liable for both penalties in the same month.

Required Information Reporting

To demonstrate compliance, Applicable Large Employers (ALEs) must file specific information returns with the IRS. The primary documents are Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Form 1094-C acts as a cover sheet for all the Forms 1095-C that an employer files. It provides the IRS with aggregate data about the employer, including contact information, the total number of 1095-C forms being filed, and certifications regarding the offers of coverage. If an employer is part of an aggregated group of companies, the form also includes information about the other members.

An ALE must prepare a Form 1095-C for every individual who was a full-time employee for one or more months of the calendar year. This form requires specific information, including the employee’s name, address, and Social Security Number. Part II of the form requires the employer to report, on a month-by-month basis, information about the health coverage offered.

This section uses a series of codes to convey complex information concisely. Line 14, “Offer of Coverage,” uses codes to describe the type of coverage offered, if any. For example, code “1E” indicates that the employer offered MEC providing MV to the employee, their spouse, and dependents. Line 16 uses codes to explain why a penalty might not apply, such as using an affordability safe harbor code or showing an employee was enrolled in the coverage offered.

Filing with the IRS and Furnishing Forms to Employees

The compliance process involves two distinct actions: furnishing the forms to employees and filing them with the IRS. The first requirement is to furnish a copy of the completed Form 1095-C to each employee for whom one was prepared. This provides employees with information about the coverage offered to them for their individual tax returns. The deadline for furnishing these forms to employees is March 2 of the year following the reporting calendar year.

The second requirement is to file the forms with the IRS. The deadline for paper filing is February 28, while the deadline for electronic filing is March 31. A rule now mandates electronic filing for employers submitting 10 or more information returns in aggregate during the calendar year, which effectively requires nearly all ALEs to file electronically.

Electronic filing is done through the IRS’s Affordable Care Act Information Returns (AIR) system. This system requires filers to format their data into specific file types that meet IRS specifications. After uploading the transmission file, the employer will receive an acknowledgement from the IRS indicating whether the submission was accepted or rejected. An employer may later receive an IRS Letter 226J, which is the official notice proposing an ESRP payment based on the information reported.