Types of employer payments and how they're calculated
In general, an ALE member will owe this first type of employer shared responsibility payment if, for any month, it does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents), and if at least one full-time employee receives the premium tax credit for purchasing coverage through the Marketplace. An employer subject to this first type of employer shared responsibility payment will not be subject to the second type of employer shared responsibility payment described below.
If an ALE member offered minimum essential coverage to all but five of its full-time employees (and their dependents), and five is greater than 5 percent of the number of full-time employees of the employer, the employer will not be subject to this employer shared responsibility payment. That is, for these smaller ALEs, this special standard applies instead of the 95 percent standard. For example, an ALE member with 70 full-time employees that fails to offer minimum essential coverage to four full-time employees (5.7 percent) will still not be subject to this first employer shared responsibility payment.
For purposes of the employer shared responsibility provisions, a dependent is an employee’s child (including a child who has been legally adopted or placed for adoption) who has not reached the age of 26. A child is treated as a dependent for the entire calendar month during which he or she turns 26. For purposes of this provision, spouses are not considered dependents, and neither are stepchildren or foster children. For the full definition of dependent under the employer shared responsibility provisions, see section 54.4980H-1(a)(12) of the ESRP regulations.
There are two forms of transition relief that are relevant to this first employer shared responsibility payment.
- Offer-of-coverage transition relief for 2015. First, for each calendar month during 2015 (and any calendar months during the 2015 plan year that occur in 2016, if the employer has a non- calendar year plan), an employer that offers minimum essential coverage to at least 70 percent of its full-time employees (and their dependents) will not be subject to this first employer shared responsibility payment. See Employer Shared Responsibility Provision: Transition Relief for 2015 Plan Years for more information. See also Q&A #60-64 on our employer shared responsibility questions and answers page for the year 2016.
- Dependent transition relief for 2015. Second, for the 2014 and 2015 plan years, for an employee whose dependents were not offered minimum essential coverage during the 2013 or 2014 plan years, an employer may treat an offer of minimum essential coverage to a full-time employee but not his or her dependents, as an offer of minimum essential coverage to the full-time employee and his or her dependents, if the employer takes steps during the 2014 or 2015 plan year (or both) to extend coverage under the plan to dependents not offered minimum essential coverage during the 2013 or 2014 plan year (or both). See Employer Shared Responsibility Provision: Transition Relief for 2015 Plan Years for more information
How is this payment calculated?
If an ALE member is subject to this first type of employer shared responsibility payment, the annual payment will be $2,000 for each full-time employee (without regard to whether each employee received a premium tax credit), after excluding the first 30 full-time employees from the calculation. If the ALE includes multiple ALE members, the 30 reduction is distributed ratably across the controlled group based on each ALE member’s number of full-time employees.
The IRS will determine whether an ALE member owes this payment on a month-by-month basis. Thus, an ALE member who owes the payment will pay $166.67 (1/12 of $2,000) per month per full-time employee. The $2,000 amount is indexed for inflation. See Q&A #55 on our employer shared responsibility page for the inflationary amounts.
- For more details see Notice 2015-87 PDF (question 13).
Part-time employees and full-time equivalent employees do not factor into this calculation. Also, certain full-time employees are not included in this payment calculation, for example, very generally, a full-time employee in a waiting period. For more information, see the definition of limited non-assessment period for certain employees under section 54.4980H-1(a)(26) of the ESRP regulations. However, full-time employees with coverage from the employer or from another source do factor into this payment.
Transition relief for calculating this employer shared responsibility payment is available for 2015. For 2015 (and the months in 2016 that are part of the 2015 plan year for an employer with a non-calendar year plan year), if an ALE with 100 or more full-time employees (including full-time-equivalent employees) is subject to this payment, the number of full-time employees used to calculate the employer shared responsibility payment will be reduced by 80 rather than 30 (which is the standard reduction). This will have the effect of lowering the payment amount. See Employer Shared Responsibility Provision: Transition Relief for 2015 Plan Years for more information.
2. Employer shared responsibility payment for failure to offer affordable minimum essential coverage that provides minimum value
Which employers will owe this payment?
Even if an ALE member offers minimum essential coverage to a sufficient number of full-time employees (and their dependents) so as not to be liable for the employer shared responsibility payment described above, the employer will generally still owe the second type of employer shared responsibility payment for each full-time employee (if any) who receives the premium tax credit for purchasing coverage through the Marketplace. In general, a full-time employee could receive the premium tax credit if: (1) the minimum essential coverage the employer offers to the employee is not affordable; (2) the minimum essential coverage the employer offers to the employee does not provide minimum value; or (3) the employee is not one of the at least 95 percent of employees offered minimum essential coverage.
An employer may be subject to this payment for a month only if it is not subject to the first type of employer shared responsibility payment (payment for failure to offer minimum essential coverage) described above. For more information about affordability see also our Minimum Value and Affordability page.
How is this payment calculated?
If an ALE member owes this second type of employer shared responsibility payment, the annual payment will be $3,000 for each full-time employee who received the premium tax credit.
The IRS will determine whether an ALE member owes this payment on a month-by-month basis. Thus, an ALE member who owes the payment will pay $250 (1/12 of $3,000) per month for each full-time employee who received the premium tax credit. (Unlike the first employer shared responsibility payment, this calculation does not include full-time employees who enrolled in coverage under the employer’s plan, or who had other non-Marketplace coverage, or who did not have any coverage.) The $3,000 amount is indexed for inflation. See Q&A #55 on our employer shared responsibility page for the inflationary amounts.
For more details see Notice 2015-87 PDF (question 13).
The total amount of this second type of employer shared responsibility payment cannot exceed the amount that the employer would have owed had it been liable for the first type of employer shared responsibility payment, described above. This limitation ensures that the payment for an employer that offers minimum essential coverage can never exceed the payment that the employer would owe if it did not offer minimum essential coverage.
Part-time employees and full-time equivalent employees do not factor into this calculation. Also, certain full-time employees are not included in this payment calculation, for example, very generally, a full-time employee in a waiting period. For more information, see the definition of limited non-assessment period for certain employees under section 54.4980H-1(a)(26) of the ESRP regulations.
Example 1: Employer Is Liable for the Whole Year for Employer Shared Responsibility Payment for Failure to Offer Minimum Essential Coverage
Based on its number of full-time employees in 2016, Company K is an ALE for 2017. Company K has 70 full-time employees for each month of 2017. Company K does not offer minimum essential coverage to its full-time employees (and their dependents) for any month of 2017. One full-time employee obtains health insurance through the Marketplace and receives the premium tax credit for each month of 2017.
Because Company K does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents) for each month of 2017 and at least one full-time employee received the premium tax credit, Company K is subject to the first type of employer shared responsibility payment described above. For 2017, Company K is subject to an employer shared responsibility payment of $80,000, calculated as follows:
- Number of full-time employees less 30 (70 – 30) x $2,000 = $80,000. This example does not reflect the inflation adjustment to the $2,000 figure.
Example 2: Employer is Liable for Certain Months for the Employer Shared Responsibility Payment for Failure to Offer Minimum Essential Coverage
Based on its number of full-time employees in 2016, Company L is an ALE for 2017. Company L has 70 full-time employees for each month of 2017. Company L does not offer minimum essential coverage to its full-time employees (and their dependents) for the first nine months of 2017. One full-time employee obtains health insurance through the Marketplace and receives the premium tax credit for each of those nine months. For the last three months of 2017, Company L does offer minimum essential coverage to its 70 full-time employees (and their dependents). No full-time employee receives the premium tax credit for the last three months of 2017.
Because Company L does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents) for the first nine months of 2017 and at least one full-time employee received the premium tax credit for those months, Company L is subject to the first type of employer shared responsibility payment described above for the first nine months of 2017.
Because Company L does offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents) for the last three months of 2017, Company L is not subject to the first type of employer shared responsibility payment described above for the last three months of 2017. Company L also is not subject to the second type of employer shared responsibility payment described above for the last three months of 2017 because no full-time employee receives the premium tax credit for the last three months of 2017. For 2017, Company K is subject to an employer shared responsibility payment of $60,000, calculated as follows:
- Number of full-time employees less 30 (70 – 30) x 9/12 of $2,000 = $60,000. This example does not reflect the inflation adjustment to the $2,000 figure.
Example 3: Employer is Liable for Employer Shared Responsibility Payment for Failure to Offer Affordable Minimum Essential Coverage that Provides Minimum Value.
Based on its number of full-time employees in 2016, Company M is an ALE for 2017. Company M has 125 full-time employees for each month of 2017. For 2017, it offers minimum essential coverage to its full-time employees (and their dependents), but the minimum essential coverage is not affordable for all of the employees. Fourteen of its full-time employees obtain health insurance through the Marketplace and receive the premium tax credit for each month of the year.
Because Company M offers minimum essential coverage to its full-time employees (and their dependents), it is not subject to the first type of employer shared responsibility payment described above (payment for failure to offer minimum essential coverage) for any month of the 2017. Company M is subject to the second type of employer shared responsibility payment described above (failure to offer affordable minimum value minimum essential coverage) for each month of the year because for each month of the year, at least one full-time employee received the premium tax credit. Company M is subject to an employer shared responsibility payment of $42,000, calculated as follows:
- Number of full-time employees who received the premium tax credit for each month of the year (14) x $3,000 = $42,000.
- Number of full-time employees less 30 (125 – 30) x $2,000 = $190,000.
The limitation calculation amount of $190,000 is greater than the basic calculation amount of $42,000; therefore, the limitation calculation amount does not apply. The basic calculation amount of $42,000 is the employer shared responsibility payment amount for Company M for 2017. The $2,000 and $3,000 figures used above do not reflect inflation adjustments.
See Q&A #53-55 on our employer shared responsibility questions and answers page for more information.
Meaning of offer of coverage
Generally, if an employer fails to offer minimum essential coverage to a full-time employee for any day of a calendar month, that employee is treated as not having been offered minimum essential coverage for the entire month. If an employer fails to offer an employee an effective opportunity to elect to enroll in the coverage at least once for the plan year, or to decline to enroll if the coverage offered does not provide minimum value or is not affordable, that employee is not treated as having been offered the coverage. For an additional description of what an offer of minimum essential coverage is for purposes of the employer shared responsibility provisions, see section 54.4980H-4(b) of the ESRP regulations. For information related to offers of coverage for January 2015 see our Employer Shared Responsibility Provision: Transition Relief for 2015 Plan Years page
Assessment and collection of the employer shared responsibility payment
Employers will not report or include an employer shared responsibility payment with any tax return they may file. Instead, based on information from the employer and from employees’ tax returns, the IRS will calculate the potential employer shared responsibility payment and contact the employer to inform it of any potential liability. The employer will then have an opportunity to respond before any assessment or notice and demand for payment is made.
An employer will not be contacted by the IRS regarding an employer shared responsibility payment until after their employees’ individual income tax returns are due for that year – which would show any claims for the premium tax credit.
If, after the employer has had an opportunity to respond to the initial IRS contact, the IRS determines that an employer is liable for a payment, the IRS will send a notice and demand for payment to the employer. That notice will instruct the employer how to make the payment.
The IRS will ensure that employers receive certification when one or more employees are allowed the premium tax credit for purchasing coverage through the Marketplace.
For more information about Letter 226-J, which informs applicable large employers of their potential liability for an employer shared responsibility payment, if any, or Letter 227, which is a series of acknowledgement letters to either close an ESRP inquiry or provide next steps to the ALE, see the Making an Employer Shared Responsibility Payment section of the Employer Shared Responsibility Payment Q&As.
Non-deductibility of employer shared responsibility payment
Any employer shared responsibility payment is not deductible for federal income tax purposes.
More information
More information about the employer shared responsibility provisions is available in our questions and answers. The Department of the Treasury and the IRS have also issued the following legal guidance and information:
- ESRP Regulations on the employer shared responsibility provisions. In particular, sections 54.4980H-4 and 54.4980H-5 of the regulations address when an ALE member will be liable for an employer shared responsibility payment and how each type of payment is calculated.
- Notice 2013-45 PDF , announcing transition relief for 2014.
More information is also available in this fact sheet issued by the U.S. Department of the Treasury.
