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 potentially assesses a tax penalty to applicable large employers (ALEs) who fail to offer minimum essential coverage (MEC) to 95% of its full-time employees. ALEs also may be assessed penalties if they fail to offer affordable coverage that meets minimum value requirements.

This provision is colloquially 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 employees or full-time equivalent employees (together FTEs) during the preceding calendar year.1

To avoid potential penalties, the ALE must2:

1. Offer 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 total allowed cost of benefits expected to be incurred, and
  • The employee’s portion of the employee-only premium is no greater than 9.61% (for 2022, as indexed) based on one of three IRS safe harbors:
    • 9.61% of Form W-2 wages from the prior calendar year
    • 9.61% of the employee’s rate of pay (not permitted for tipped or commissioned employees)
    • 9.61% of the Federal Poverty Level

2021
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 9.61% (2022 as indexed) 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)

Do not offer or discontinue employer- sponsored plan

Penalty if at least one full-time employee obtains subsidized Marketplace coverage None

$4,060 annually for each full-time employee that obtains subsidized Marketplace coverage2

$2,700 annually per full-time employee, minus the first 30

$2,700 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

Know the IRS reporting requirements, deadlines and non-compliance penalties for applicable large employers.
Under IRS and U.S. Treasury Department regulations, new seasonal employees are not considered "full-time," benefits-eligible even if they are expected to work 30 or more hours per...
Understand the characteristics of primary ACA controlled group types and how this impacts your applicable large employer status.