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ACA Compliance

How to Avoid the ACA Employer Shared Responsibility Fee – 2021 Tax Year

The Affordable Care Act (ACA) includes requirements for employers as well as individuals. Our eBenefits team is here to keep you informed on these requirements. Get up to speed on the employer shared responsibility fee—and ways you can avoid it.

The Affordable Care Act has employer shared responsibility (ESR) provisions that apply to large employers. Large employers are defined as those with 50 or more full-time equivalent employees. There are two components to the ESR penalty:

  • The first and most significant penalty results if a large employer fails to offer minimum essential coverage (MEC) to substantially all (95 percent) of its full-time employees and their dependents. Full-time employees are those working on average 30 hours a week or 130 hours a month, determined by using either the look-back or monthly method. This penalty is often referred to as the “no offer” penalty and the amount is $2,700 (indexed) multiplied by the total number of full-time employees, minus the first 30. At least one full-time employee must be receiving subsidized coverage in an insurance exchange to for the penalty to apply.  
  • The second component of the ESR penalty is commonly known as the “insufficient offer” penalty. An employer can be subject to this penalty when they offer coverage to their full-time employees, but that coverage is unaffordable or does not provide minimum value. Coverage is not affordable if the premium for employee-only coverage exceeds 9.83 percent (indexed) of the employee’s household income. Coverage does not provide minimum value if the plan does not pay on average at least 60 percent of the benefit costs. Most major medical plans easily meet this threshold. As a result, most employers are subject to this penalty for offering coverage that is not affordable. The penalty is $4,060 (indexed) multiplied by the number of full-time employees who are receiving subsidized coverage in an exchange.
How employers incur the ESR penalty

Applicable employers must pay penalties if at least one of their full-time employees (working 30+ hours per week) gets a premium credit/cost-sharing reduction through a Marketplace/exchange. An individual may be eligible for a premium credit/cost-sharing reduction if the employer:

  • Does not offer health care coverage.
  • Offers coverage that is not “affordable” (the employee’s annual premium for self-only coverage must not exceed 9.83 percent of household income).
  • Offers coverage that does not provide “minimum value” (the plan’s share of allowed costs under the plan must be at least 60 percent).
An employer will be liable for an excise tax payment only if:
  • The employer does not offer health coverage or offers coverage to less than 95 percent of its full-time employees, and at least one of the full-time employees receives a premium tax credit to help pay for coverage on an exchange; or
  • The employer offers health coverage to at least 95 percent of its full-time employees, but at least one full-time employees receives a premium tax credit to help pay for coverage on an exchange (this may occur because the employer did not offer coverage to that employee or because the coverage the employer offered that employee was either unaffordable to the employee or did not provide minimum value).
Calculating the ESR penalty

The fee is determined under tax code § 4980H(a) and imposed based on the number of individuals employed by the employer as full-time employees during the month.

Tips for avoiding the ESR penalty:

Tips for avoiding the ESR penalty:

  • Understand how to determine full-time employee status using either the monthly or look-back method.
  • Track and measure employee hours to determine full-time employee status.
  • Offer at least minimum essential coverage to full-time employees and dependents and document those offers of coverage.
  • To avoid insufficient offer penalties, offer affordable coverage that is at least minimum value.

The information provided does not, and is not intended to, constitute legal advice. All information, content, and materials available on this site are for general informational purposes only. Readers should contact their attorney to obtain advice with respect to any particular legal matter.


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