Affordable Care Act

ACA Fact Sheet—Employer Shared Responsibility “Pay or Play” Provision for Applicable Large Employers

Recent Insight

The Affordable Care Act (ACA) includes employer shared responsibility provisions under Section 4980H of the Internal Revenue Code, which assesses a tax penalty to applicable large employers (ALEs) who fail to offer affordable and minimum value medical coverage to 95% of its full-time employees.

This provision is also referred to as "pay or play," because ALEs potentially pay a penalty if they do not offer coverage that meets ACA requirements and one or more full-time employees obtain subsidized coverage through a health care Marketplace (also referred to as an Exchange).

An ALE is an organization who employed a monthly average of at least 50 full-time equivalent employees (FTEs) during the preceding calendar year.1

To avoid potential penalties, the ALE must2:

1. Offer minimum essential coverage (MEC) to at least 95% of full-time employees and eligible children, and

2. At least one medical plan must:

  • Meet minimum actuarial value requirements, meaning it pays for at least 60% of the cost of covered benefits, and
  • The employee’s portion of the employee-only premium is no greater than 9.86% (for 2019, as indexed) based on one of three IRS safe harbors:
    • 9.86% of Form W-2 wages from the prior calendar year
    • 9.86% of the employee’s rate of pay (not permitted for tipped or commissioned employees)
    • 9.86% of the Federal Poverty Level

2019 Calendar Year Play Selective Play MEC Only Selective Play MEC Only Pay
Medical plan offered

Offer MEC to at least 95% of full-time employees

At least one plan:
• Meets minimum value, and
• Employee pays no more than 9.86% of employee-only coverage level

Offer MEC to at least 95% of full-time employees

Plans do not meet minimum value and affordability requirements

Offer MEC to less than 95% of full-time employees (e.g. "carve-out" by class, regardless of whether plans meet minimum value and affordability requirements) Discontinue employer- sponsored plan
Penalty if at least one full-time employee obtains subsidized Marketplace coverage None $3,750 annually for each full-time employee that obtains subsidized Marketplace coverage2 $2,500 annually per full-time employee, minus the first 30 $2,500 annually per full-time employee, minus the first 30

1Please refer to the ACA “Applicable Large Employer Calculation” and “Controlled Group Overview” Fact Sheets for more information on how to determine your company’s ALE status.

2IRS website: https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act#Affordability.

TriNet does not provide legal, tax or accounting advice.

Related Articles

Is the ACA dead or alive? And what does this mean for the businesses caught in the crosshairs?
In order to avoid potential penalties, it is important for applicable large employers (ALEs) to understand how to determine which employees are considered “full-time” under the...
Is your company facing a potential employer shared responsibility tax penalty under the Affordable Care Act (ACA)? The ACA requires ALEs to offer health coverage to at least 95%...