What Are the Employer Shared Responsibility Provisions?

The Employer Shared Responsibility Provisions (ESRP) are a component of the Affordable Care Act (ACA) that requires certain employers to offer health coverage to full-time employees and their dependents. While the provisions do not force a business to offer insurance, they create a financial penalty for specific employers that fail to comply. These penalties are paid to the Internal Revenue Service (IRS). The ESRP framework operates by defining which employers are subject to the rules, the standards for health coverage, and the penalties for non-compliance.

Determining if the Provisions Apply

The first step is to determine if a business is subject to the ESRP, which hinges on its classification as an Applicable Large Employer (ALE). An ALE is a business that employed an average of at least 50 full-time employees during the preceding calendar year. This calculation includes both full-time employees and full-time equivalent employees (FTEs).

Under the ACA, a full-time employee is an individual who provides an average of at least 30 hours of service per week, or 130 hours in a calendar month. The calculation becomes more complex with part-time workers, whose hours are converted into FTEs. This process aggregates the hours of the non-full-time workforce.

To calculate the number of FTEs for a month, an employer sums the total hours of service for all non-full-time employees, capping the hours for any single employee at 120 for the month. After summing these capped hours, the total is divided by 120 to arrive at the number of FTEs for that month.

An employer then combines its number of full-time employees with its calculated FTEs for each month of the prior year. The employer averages these monthly totals over the 12-month period to find its final count. If this average is 50 or more, the business is an ALE for the current year. For example, a company with 40 full-time employees and part-time staff working 1,800 hours in a month has 15 FTEs (1,800 / 120), bringing the total to 55 and making it an ALE.

Health Coverage Requirements

Once identified as an ALE, an employer must offer health coverage meeting specific standards to its full-time employees to avoid penalties. The insurance must provide “Minimum Essential Coverage” (MEC) and be both “affordable” and offer “Minimum Value” (MV). These standards ensure the coverage is comprehensive and not prohibitively expensive for the employee.

Minimum Essential Coverage is a baseline standard for health insurance. Most employer-sponsored group health plans, such as PPOs and HMOs, satisfy the MEC requirement. The definition is broad, ensuring the plan provides a basic level of medical care and is not a limited-benefit plan like one covering only dental or vision.

A plan provides minimum value if it is designed to pay for at least 60% of the total allowed costs of benefits for a standard population. Employers can confirm their plan meets this threshold by consulting their insurance provider or using the MV Calculator from the U.S. Department of Health and Human Services. The plan must also offer substantial coverage for inpatient hospital and physician services.

Affordability is tested based on the employee’s required contribution for the lowest-cost, self-only coverage that provides minimum value. For 2025, this contribution cannot exceed 9.02% of the employee’s household income. Since employers do not know an employee’s total household income, the IRS provides three safe harbors for the calculation: the Form W-2 safe harbor, the Rate of Pay safe harbor, and the Federal Poverty Line safe harbor. Using one of these methods allows an employer to prove it offered affordable coverage.

Calculating Potential Penalties

An ALE that fails to meet coverage requirements may be subject to one of two Employer Shared Responsibility Payments. These penalties are triggered only if at least one of the ALE’s full-time employees receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace.

The first penalty, the “A” penalty, applies when an ALE fails to offer Minimum Essential Coverage to at least 95% of its full-time employees and their dependents. The formula is the ALE’s total number of full-time employees (minus a 30-employee exclusion) multiplied by an inflation-adjusted annual amount. For 2025, this penalty is $2,900 per employee, so an ALE with 100 full-time employees that fails the 95% test would face an annual payment of $203,000, calculated on 70 employees (100 – 30).

The second penalty, or “B” penalty, applies if an ALE offers coverage to at least 95% of its full-time employees, but the coverage is either unaffordable or does not provide minimum value for a specific employee who then gets a premium tax credit. This penalty is calculated on a per-employee basis for each full-time employee who receives the tax credit.

The annual penalty for 2025 is $4,350 for each employee who receives a credit. For example, if an ALE’s plan is unaffordable for five full-time employees who all receive a tax credit, the employer’s annual penalty would be $21,750 (5 x $4,350). A key rule is that the total “B” penalty for a year can never exceed the amount the employer would have owed under the “A” penalty calculation.

Information Reporting Requirements

The IRS enforces the ESRP through a detailed information reporting system. This system requires ALEs to file specific forms annually that document the health coverage they offered throughout the year. These forms provide the IRS with the data needed to determine if an employer has complied and if any penalties are owed.

The primary document for employees is Form 1095-C, Employer-Provided Health Insurance Offer and Coverage. An ALE must provide a Form 1095-C to every person who was a full-time employee for any month of the calendar year. This form details, on a month-by-month basis, the type of health coverage offered, the employee’s share of the premium for the lowest-cost plan, and enrollment status.

In addition to providing Form 1095-C to employees, the employer must file copies with the IRS. These are submitted with a summary transmittal, Form 1094-C. This cover sheet provides aggregate data for the employer, such as certifying that it offered MEC to at least 95% of its full-time employees. This information is cross-referenced with data from the Health Insurance Marketplace to identify employees who received premium tax credits, which triggers the ESRP penalties.