Applicable Large Employers (ALEs) are those who employed 50 or more full-time equivalent employees in the previous calendar year. Under the Affordable Care Act (ACA) law, ALEs must offer minimum essential coverage to at least 95% of its full-time employees or they risk penalties. ALEs who fail to meet this offer requirement risk a significant penalty if just one full-time employee receives a subsidized individual health insurance plan through a Marketplace.
 

The penalty for 2023 is $2,880 per full-time employee; however, the employer is not penalized for the first 30 full-time employees. For example, an employer with 200 full-time employees would pay a penalty of (200-30) x $2,880, or $489,600. The penalty amount per full-time employee will increase to $2,970 in 2024.
 

There is a second potential penalty ALEs are subject to even if they meet the 95% offer requirement. The coverage offered to full-time employees must provide minimum value and must be considered affordable to avoid the risk of a different penalty. Coverage is considered affordable in 2023 if an employee has to pay no more than 9.12% of their income for the lowest-priced plan offered to them. The affordability percentage for 2024 will be adjusted and is not yet known.
 

The penalty for 2023 is $4,320 per full-time employee; however, this penalty only applies to full-time employees who were not offered an affordable plan with minimum value, and it only applies to those full-time employees who waive coverage under the employer’s plan and enroll in a subsidized plan through a Marketplace.
 

Assume that same employer with 200 full-time employees met the 95% offer requirement but for 10 of the fulltime employees the coverage was considered unaffordable and/or did not provide minimum value. If each of those 10 full-time employees waived coverage under the employer’s plan and qualified for a subsidized Marketplace plan, the employer would be subject to a penalty of 10 x $4,320, or $43,200. The penalty amount per full-time employee will increase to $4,460 in 2024.
 

Employers who are subject to a penalty will receive a letter from the Internal Revenue Service (IRS). This letter is referred to as Letter 226-J. Employers will be able to contest any penalty assessed if they disagree with the IRS. Often, mistakes are made on Form 1094-C or 1095-C which are the forms used by employers to report information to the IRS about their offers of coverage to full-time employees. If a penalty was assessed due to a reporting error, that penalty can be reduced or eliminated by responding to Letter 226-J. Instructions will be provided with Letter 226-J on how to appeal a penalty.
 

For more information on the Employer Mandate, please click here.