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Employer Mandate

  • 8858. How does an employer determine whether it is an applicable large employer and subject to the ACA employer shared responsibility provision?

    • Editor’s Note: The 2017 tax reform legislation repealed the Affordable Care Act individual mandate that required individuals to purchase health insurance or pay a penalty for tax years beginning after December 31, 2018. The employer mandate and reporting requirements were not repealed. In 2018, a Texas district court1 ruled that, absent the individual mandate, the entire ACA was unconstitutional. In June 2021, the United States Supreme Court held that the plaintiffs lacked standing to sue and the law remains intact as of the date of this publication.

      Only employers who are “applicable large employers” are subject to the ACA employer shared responsibility provisions. An applicable large employer is one with at least 50 full-time equivalent employees (FTEs). These employers must offer health insurance coverage meeting specified requirements or pay a $2,000 per full-time worker penalty (after its first 30 employees) if any of its FTEs receive a federal premium subsidy through a state health insurance exchange (which would occur because the employee was not being offered sufficient coverage through the employer) (see Q 8844).


      Planning Point: A small employer does not become an applicable large employer merely due to its participation in an association health plan, through which it offers health coverage to employees, even if more than 50 full-time employees are covered by the association health plan as a whole.


      Whether or not the employer is an applicable large employer that is subject to the shared responsibility provisions is based upon the number of FTEs employed by the employer in the preceding tax year (so that the employer’s status as a large employer for 2022 is based on its FTEs during 2021).2

      FTEs are determined based on each employee’s hours of service. An employee is a full-time employee if he or she averages at least 30 hours of work per week.3 However, an employee who averages 130 hours of work per month is treated as an employee who works at least 30 hours per week and, as such, is a full-time employee.4

      An employer must also count as FTEs certain employees who do not work an average of 30 hours per week. This number is determined by dividing the total number of hours of service worked by employees who are not full-time employees in any month by 120. The resulting number must be added to the number of full-time employees as determined in the preceding paragraph.5

      Seasonal employees are taken into consideration, but if any employer exceeds 50 FTEs for 120 days or fewer during the year and the employees in excess of 50 employed during the 120-day period are seasonal workers, the employer will not be treated as an applicable large employer.6 The preamble to the regulations and IRS Q&A addressing the issue define “seasonal worker” as one who performs services on a seasonal basis as defined by the Secretary of Labor, and retail workers employed exclusively during holiday seasons, but also note that the employer is entitled to apply a reasonable, good faith interpretation of the term seasonal worker.

      Employers should note that an optional “look-back” measurement period is available, but only for purposes of calculating the employer mandate penalty assessments. The look-back measurement cannot be used for purposes of determining whether the employer is an applicable large employer that is subject to the shared responsibility provisions.7


      1. Texas v. United States, No. 4:18-cv-00167-O.

      2. IRC § 4980H(c).

      3. IRC § 4980H(c)(4).

      4. Treas. Reg. § 54.4980H–1(a)(21)(ii).

      5. IRC § 4980H(c)(2)(E).

      6. IRC § 4980H(c)(2)(B).

      7. See IRS Q&A on the Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act (last accessed Aug. 9, 2022).

  • 8859. How does an employer that has been in existence for less than one year determine whether it is subject to the ACA shared responsibility provisions?

    • In general, an employer’s status as an applicable large employer is determined based on the number of full-time equivalent employees it employed in the previous year (see Q 8858). For an employer that was not in existence during the previous year, determination of whether it is an applicable large employer and thus subject to the ACA shared responsibility provisions is based upon the number of employees that it reasonably expects that it will employ during the current year. The penalty provisions will apply only if the employer actually does employ an average of 50 or more full-time employees (and equivalents) during its first year of existence.1 An employer was not in existence during the previous calendar year only if it was not in existence on any business day during that year.2

      An employer who was not in existence for the previous year is also entitled to exclude seasonal workers (see Q 8858) from its calculation if it reasonable expects to employ workers meeting the definition of seasonal worker during its first year of existence.3


      1. IRC § 4980H(c)(2)(C)(ii).

      2. Treas. Reg. § 54.4980H–2(b)(3).

      3. Treas. Reg. § 54.4980H–2(b)(2).

  • 8860. How does an employer that has a common owner with another employer determine whether it is subject to the ACA shared responsibility provisions?

    • Two or more employers who are controlled by the same owner or are otherwise related are considered to be a single employer if those employers are treated as a single employer under IRC Section 414.1 IRC Section 414 treats two or more employers as one if they are: (1) part of a controlled group of corporations, (2) trades or businesses that are under common control, (3) affiliated service groups or (4) related through other arrangements generally having the same effect as in groups (1)-(3).2

      These employers are combined in determining whether they collectively employ 50 or more full-time employees for purposes of applicable large employer status. If the combined total number of full-time employees exceeds 50 full-time employees (including equivalents), each employer is subject to the shared responsibility provisions even if no single employer crosses the threshold.


      1. IRC § 4980H(c)(2)(C)(i).

      2. IRC §§ 414(b), (c), (m), (o).

  • 8861. Will an employer be subject to the ACA shared responsibility provisions if it offers employees and their dependents coverage that is both affordable and provides minimum value, but some of its employees, their spouses and/or dependents obtain coverage through the health insurance marketplace, Medicaid or Medicare?

    • No. If an applicable large employer offers coverage that is affordable and provides minimum value, the employer will not be subject to the shared responsibility provisions if some of its employees, or their spouses or dependents, obtain coverage from another source, such as through the insurance marketplace or through Medicare or Medicaid.

      The employer will not be subject to the shared responsibility payment unless one of its employees receives a premium tax credit.1 If the employer offers coverage that is both affordable and provides minimum value to employees and their dependents, neither the employees nor their dependents will be eligible for the premium tax credit if they elect to purchase insurance through the exchanges. Employees (or dependents) who are eligible for Medicare or Medicaid are not eligible for a premium tax credit.2


      1. IRC § 4980H(a).

      2. See Preamble to the Final Regulations, TD 9655.

  • 8862. If an employer offers health coverage to fewer than 95 percent of its full-time employees, how is the employer shared responsibility payment amount calculated? 

    • If the employer offers health coverage to fewer than 95 percent of its full-time employees, it may be subject to the shared responsibility provisions and owe a payment if any full-time employee purchased insurance through the exchanges and received a premium tax credit.1

      To calculate this payment, the employer multiplies the number of full-time employees it employed for the year (minus up to 30, and the number of full-time employees who were offered coverage) by $2,000.2 For purposes of this calculation, a full-time employee does not include a full-time equivalent employee.

      If the employer offers coverage for some months, but not for others, it must calculate its shared responsibility payment separately for the months in which coverage was not offered. The payment is equal to the number of full-time employees employed for the month (minus up to 30, and the number of full-time employees who were offered coverage) multiplied by 1/12 of $2,000. If the employer does not offer coverage to a full-time employee on any day of a calendar month, that employee is treated as not having been offered coverage for the entire month.3


      1. IRC § 4980H(a).

      2. Treas. Reg. § 54.4980H-5(a).

      3. Treas. Reg. § 54.4980H-5(c).

  • 8863. If an employer offers health coverage to 95 percent or more of its full-time employees, but owes a shared responsibility penalty regardless, how is the amount of the payment owed calculated? 

    • An employer who offers health coverage to at least 95 percent of its full-time employees, but owes a shared responsibility payment because one or more of its full-time employees received a premium tax credit, must calculate its liability separately for each month. This situation can arise, for example, if the employer offered coverage but that coverage was unaffordable or failed to provide minimum value for one or more full-time employees.

      The payment amount is calculated by multiplying the number of full-time employees who receive a premium tax credit for the month by 1/12 of $3,000. There is, however, a payment cap equal the number of full-time employees for the month (minus up to 30) multiplied by 1/12 or $2,000, which ensures that the penalty for employees that offer coverage never exceeds the penalty for employers who fail to offer coverage.1


      1. IRC § 4980H(b).

  • 8864. When will employer-provided “wraparound” coverage constitute excepted benefits that are not subject to the ACA market reform provisions?

    • The departments of Treasury, Health and Human Services and Labor have released final rules that outline the requirements that certain limited health benefits, which are “wrapped around” employer-sponsored health coverage, must meet in order to qualify as excepted benefits that would not preclude the employee from claiming a premium tax credit.

      The rules establish five requirements that employer-sponsored wraparound coverage offered in conjunction with an individually purchased health plan must satisfy in order to constitute an excepted benefit that would not jeopardize an employee’s eligibility to claim a premium tax credit. The limited wraparound coverage must:

      (1) Be specifically designed to supplement eligible individual health coverage by providing additional meaningful benefits;

      (2) Be limited in amount. The final regulations set the limit as the greater of the maximum permitted annual salary reduction toward a health FSA or 15 percent of the cost of coverage under the primary plan;

      (3) Satisfy certain nondiscrimination requirements by not (a) imposing preexisting condition exclusions, (b) discriminating based on any individual health factors or (c) being excludable from the employee’s income under IRC Section 105;

      (4) Provide that individuals who are eligible for the wraparound coverage cannot also be enrolled in excepted benefit coverage that is a health FSA, and meet certain standards with respect to eligibility designed prevent employers from failing to offer minimum essential health coverage to full-time employees as otherwise required by the ACA; and

      (5) Satisfy certain reporting requirements by submitting certain information to the Office of Personnel Management that is sufficient to allow it to determine whether the coverage meets these requirements.

      These rules apply as a pilot program with a sunset date, so that the wraparound coverage must be first offered no earlier than January 1, 2016 and no later than December 31, 2018, and end on the later of (1) the date that is three years after the date the wraparound coverage is first offered or (2) the date on which the last collective bargaining agreement relating to the plan terminates after the date the wraparound coverage is first offered.1


      1. TD 9714.

  • 8865. How does an employer measure an employee's hours in determining whether that employee is a full-time employee for purposes of the ACA shared responsibility provisions?

    • The employer shared responsibility provisions imposed by the ACA only apply to employers with 50 or more full-time employees (or the equivalent of 50 or more full-time employees). Determining full-time status hinges on an employee’s average hours of service (employees averaging at least 30 hours of service per week are considered full-time and regulations provide that 130 hours in a month is treated as the equivalent of 30 hours per week).1

      An employer has the option of choosing one of two methods for measuring an employee’s hours in order to determine full-time status. The first is a monthly measurement period under which the employer counts the employee’s hours of service each month.2 The second is called the “look-back” measurement period. The look-back measurement period, however, cannot be used to determine whether the employer is subject to the shared responsibility provisions in general (i.e, to determine whether the employer is an applicable large employer). The look-back measurement period is used instead (1) to determine whether an employer who is already offering health coverage has failed to satisfy the ACA standards so as to be liable for a penalty and (2) to calculate that penalty.3

      The look-back measurement period allows an employer to determine the employee’s status during a later period (the “stability period”) based on the employee’s hours of service during an earlier period (the “measurement period”).4 The measurement period must be a period of no more than twelve months and no less than three months, as determined by the employer. The employer can determine when the measurement period starts and ends, so long as that determination is made on a uniform and consistent basis for all employees in the same employment category (the regulations provide examples of permissible employment categories, including, among others, salaried and hourly employees, and collectively bargained and non-collectively bargained employees).5

      If the employee is a full-time employee during the measurement period, he or she must be treated as a full-time employee during the stability period regardless of whether he or she would be a full-time employee based on hours of service during the stability period. The stability period must be at least six calendar months, but can in no event be shorter than the measurement period.6 The final regulations note that an employer is entitled to treat additional employees as full-time employees even if their hours of service would not otherwise cause them to obtain full-time status under either of the measurement options.


      1. IRC § 4980H(c)(4).

      2. Treas. Reg. § 54.4980H-3(c).

      3. See Preamble to the Final Regulations, TD 9655.

      4. Treas. Reg. § 54.4980H-3(d)(1)(i).

      5. Treas. Reg. § 54.4980H-3(d)(1)(i).

      6. Treas. Reg. § 54.4980H-3(d)(1)(iii).

  • 8866. What constitutes an hour of service for purposes of determining whether an employee is a full-time employee in light of the ACA shared responsibility provisions?

    • An hour of service is generally each hour for which an employee is paid, or is entitled to receive payment, for the performance of services for the employer. An hour of service also includes any hours for which an employee is paid, or is entitled to receive payment, during a time period where no services are actually performed (for example, because the employee is entitled to paid vacation, paid sick leave, holiday pay, jury duty pay, etc.).

      Hours of service do not include hours spent performing services for an employer as a volunteer or pursuant to a federal work-study program (or substantially similar program). To the extent payment for an employee’s services comes from a non-U.S. source, the hours spent performing those services are also excluded.

      In some cases, an employee may be counted as a full-time employee for purposes of determining applicable large employer status even if that employee is not technically performing his or her job duties. If an employee is receiving short-term or long-term disability benefits, he or she may still be counted as a full-time employee if the employee retains his or her status as an employee and the disability benefits are paid for by the employer. Hours of service will result from employees receiving disability benefits under these circumstances even if the employee is not receiving his or her full compensation (for example, an employee receiving 80 percent of his or her compensation for 40 hours per week will still be credited with 40 hours of service per week, and will thus be a full-time employee). However, if the employee pays for the disability payment arrangement on an after-tax basis, no hours of service will result. Further, if the employee is not working, but is receiving workers compensation benefits, no hours of service will result.

  • 8867. How does a small employer who hires additional employees throughout the year determine whether it is subject to the ACA shared responsibility provisions if some of those employees are part-time employees?

    • An employer determines whether it employs 50 or more full-time employees (or full-time equivalents) during a year by calculating how many full-time employees it employed in the prior year. The employer first counts employees working at least 30 hours per week on a monthly basis as full-time employees. If the employer has part-time employees, it must also add full-time equivalent employees (which is determined by adding up the hours worked by all part-time employees and dividing by 120). The employer adds the totals for each month and divides by twelve to determine whether it employs 50 or more full-time employees for the year.1

      Therefore, if an employer hires additional employees throughout the year, it may cause it to become subject to the ACA shared responsibility provisions in the following year if the additional employees’ hours of service cause the employer to cross the 50 full-time employee threshold as calculated above.


      1. See IRS Questions and Answers on the Employer Shared Responsibility Provisions, available at https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act (last accessed Aug. 9, 2022).

  • 8868. How does a small employer that purchases another business during the year determine whether it is subject to the ACA shared responsibility provisions if the new business is a separate business entity?

    • When one small employer purchases another business, even if the two businesses are separate legal entities, the employer must generally combine the number of full-time employees working for each business during the year in order to determine whether it is subject to the shared responsibility provisions.1 This is the case if the businesses are separate legal entities, but are controlled by the same business owner. The criteria for determining whether a group of businesses is a controlled group under IRC Section 1563 apply in determining whether two or more businesses must be aggregated for purposes of the shared responsibility provisions.

      Therefore, a parent-subsidiary group must be aggregated if, within the group, stock representing 80 percent of the voting power of all stock in each corporation is owned by one or more of the other corporations in the group and the parent corporation owns at least 80 percent of voting power, or 80 percent of the total shares, of at least one other corporation in the group.

      A “brother-sister” controlled group exists if five or fewer people who are individuals, estates or trusts own at least 50 percent of the combined voting power, or 50 percent or more of the stock value, of each corporation.2 Similar ownership arrangements may also require aggregation in calculating whether the overall group employs 50 or more full-time employees and is thus subject to the shared responsibility provisions.


      1. IRC 4980H(c)(2)(C).

      2. IRC §§ 4980H(c)(2)(C), 414(b), 1563.

  • 8869. If an employer with fewer than 50 full-time employees offers health coverage that is generally affordable and provides minimum value to employees, but for certain employees the coverage is not affordable and so those employees purchase health insurance through the market and receive premium tax credits, is that employer subject to the ACA shared responsibility provisions?

    • No. An employer with fewer than an average of 50 full-time employees on business days during the preceding calendar year is not subject to the shared responsibility provisions even if it offers health coverage that is not affordable to certain of its employees who, as a result, receive the premium tax credit.1
      Further, for 2015, transition relief was available for employers with fewer than 100 full-time employees that offered coverage that was not affordable or did not provide minimum value. An employer was not subject to the shared responsibility provisions in 2015 (or, for non-calendar year plans, that portion of the plan year that fell within 2016) if the following conditions were satisfied:

      1. The employer employed, on average, at least 50 full-time employees but fewer than one-hundred full-time employees in 2014.
      2. The employer did not reduce its workforce or overall hours of employees’ service between February 9, 2014 and December 31, 2014, unless such reduction was made for bona fide business purposes.
      3. The employer did not eliminate or materially reduce any health coverage that it offered as of February 9, 2014, before December 31, 2015.
      4. The employer certified that it meets the eligibility requirements described above.2

      1. IRC 4980H(b). See also IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

      2. See Preamble to the Final Regulations, TD 9655, Section XV.D.6.

  • 8870. If an employer is subject to the shared responsibility provisions, but all of its employees obtain other health coverage, is that employer still required to offer health coverage?

    • Yes, an applicable large employer remains subject to the shared responsibility provisions even if all of its employees obtain coverage from other sources. However, the employer will only be required to pay the shared responsibility penalty if one or more of its employees receives a premium tax credit for purchasing individual health coverage. The shared responsibility penalty is calculated based on the number of full-time employees for the month in which an employee receives the premium tax credit.1

      1. IRC 4980H(a)(2).

  • 8871. If an employer offers health coverage to all full-time employees, but not to their dependents, is that employer subject to the ACA shared responsibility provisions?

    • Yes, if the employer is otherwise required to offer health coverage and fails to offer health coverage to the dependents of its employees, the employer will be subject to the shared responsibility penalty if one of those employees receives the premium tax credit for insurance purchased through the marketplace.


      Planning Point: Note that IRS FAQ issued on the subject provides that an employer does not become liable for a shared responsibility penalty if only the dependent receives the premium tax credit.1


      The IRS provided transition relief for the 2014 and 2015 plan years for employers who offered coverage to employees but failed to offer dependent coverage so that the shared responsibility penalty was not assessed if the following were true:

      (1) The employer failed to offer dependent coverage.

      (2) The employer offered dependent coverage, but that coverage failed to constitute minimum essential coverage.

      (3) The employer offered dependent coverage to some, but not all, of its employees’ dependents.

      Further, the transition relief is only available to employers who did not offer dependent coverage in 2013 or 2014. The employer is required to take steps toward offering dependent coverage in 2014 or 2015 in order to take advantage of the transition relief. 2


      1. See IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

      2. Preamble to the final regulations, TD 9655.

  • 8872. If a taxpayer owns a business and the only employees are that taxpayer and his or her spouse, is that taxpayer still eligible for the self-employment health insurance tax deduction with respect to health coverage purchased through the health insurance marketplace?

    • Yes, a self-employed owner of a small business is entitled to claim the self-employment health insurance tax deduction for health coverage purchased on the health insurance marketplace for the taxpayer and his or her family. This is the case if the taxpayer purchases the health insurance through the individual marketplace or through the small business (SHOP) marketplace. However, if the taxpayer claims the premium tax credit, the amount of the premium tax credit received cannot be deducted.1

      1. See IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

  • 8873. Does a retiree-only health reimbursement arrangement (HRA) provide minimum essential coverage under the ACA market reform provisions?

    • Yes. A retiree-only health reimbursement arrangement (HRA) is not subject to the annual dollar limit prohibitions because it is a plan with fewer than two current employees.1 This is the case even if the retiree-only HRA is designed to reimburse the retiree for the cost of health coverage purchased through the individual health insurance exchanges.2 Because a retiree-only HRA has fewer than two current employees, it provides minimum essential coverage for purposes of IRC Sections 5000A and 36B.

      1. See DOL Technical Release No. 2013-03.

      2. Preamble to the Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan Under the Patient Protection and Affordable Care Act, 75 Fed. Reg. 34538, 34539.

  • 8874. Can an employer offer high-risk employees a choice between enrollment in a group health plan or cash without violating the Affordable Care Act market reform provisions?

    • No. The Department of Labor has released guidance providing that an employer who offers high-risk employees a choice between enrollment in a group health plan or cash violates the nondiscrimination requirements of the Affordable Care Act.1 This is the case regardless of whether the cash payment is pre-tax or after-tax and regardless of whether the employee obtains individual health coverage from another source.2

      1. IRC § 9815.

      2. See DOL FAQ About the Affordable Care Act Implementation (Part XXII), available at: https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/faqs/aca-part-xxii.pdf (last accessed Aug. 9, 2022).

  • 8875. Will an employer receive a notification if it owes a shared responsibility penalty under the ACA?

    • Yes. According to IRS guidance, an employer will receive a notification if one or more of its employees has received the premium tax credit that can generate employer liability for a shared responsibility penalty. The IRS will then contact the employer with a determination of whether it owes a shared responsibility payment, giving the employer an opportunity to respond before a notice and demand for payment is made. Such contact will not be made, however, until after the due date for the individual employees’ tax returns for the year, as this is how the individual employees will claim premium tax credits. The date of contact will also be delayed until after the filing deadline for the returns of applicable large employers that outline the number of full-time employees and any coverage offered.1


      Planning Point: As expected, the IRS did not provide transition relief to extend the deadline for providing Form 1095-C to individuals in 2021. However, late in November 2021, the IRS proposed regulations2 that would permanently extend the 30-day reporting relief. Taxpayers can rely on these regulations for tax years beginning after December 30, 2020. As a result, the deadline for furnishing Forms 1095-B and 1095-C to individuals is March 2, 2022. For part-time employees and non-employees enrolled in the plan, the employer would not be required to mail the forms to the plan participants under the proposed regulations. Instead, they could provide a clear and conspicuous notice on the website stating that these individuals can request a copy of their statement (employers must continue to send the forms to full-time employees).

      Form 1094-C and Form 1095-C that must be provided to the IRS are not subject to the extension. The employer must furnish these filings to the IRS by February 28, 2022 if the filing is on paper and March 31, 2022 if the employer is filing electronically. For 2020 only, the IRS extended the relief that may allow employers to escape liability if they made a good faith effort to comply with all filing requirements (the proposed regulations would eliminate the good faith penalty relief entirely).

      Under current law, employers that submit 250 or more of the same form must use electronic filing systems. However, the IRS has proposed a new rule that would require nearly all employers to file electronically (lowering the threshold to 100 forms in 2022 and ten forms starting in 2023). Employers would also be required to aggregate all forms that they have submitted.

      Because the individual mandate is now $0, the IRS will also not impose a penalty under IRC Section 6722 upon employers who fail to provide Form 1095-B to individuals if certain requirements are satisfied. These requirements include (1) the entity must post a statement on its website that Form 1095-B can be obtained upon request, including an email address and physical address where such requests can be made and a phone number for questions, and (2) Form 1095-B must be provided to any individual who makes the request within 30 days.3


      The IRS has released guidance updating its procedures for notifying employers if they owe a shared responsibility penalty. Employers that may be liable for a penalty will first receive a Letter 226J, which will include:

      (1) A brief description of IRC Section 4980H;

      (2) A table summarizing the penalty for each month (including a description as to whether IRC Section 4980H(a) or 4980H(b) applied);

      (3) An explanation of the summary table;

      (4) An employer shared responsibility response form (Form 14764);

      (5) A list of each full-time employee that received a premium tax credit for a month that the employer did not qualify for an affordability safe harbor (or other relief);

      (6) A description of the employer’s options based on whether the employer decides to pay the penalty or appeal; and

      (7) A description of the actions the IRS will take if a timely response is not received.

      Form 14765 will also be included with the Letter 226J, and will provide the name and a truncated Social Security number of each employee that (1) was identified on the employer’s Form 1095-C, (2) received a premium tax credit and (3) for which the employer did not report an affordability safe harbor or relief from the employer mandate for a month where the employee received the premium tax credit. The identified employees will be those for which the employer may be liable for a penalty. The Form 14765 also instructs employers who believe there has been an error in the form to make the necessary changes to the Form 14765, and include the corrected form with the Form 14764 to indicate a disagreement with the IRS.

      The employer has 30 days to respond once it receives a Letter 226J, and if the employer fails to respond, the IRS will assess the penalty and issue Notice CP 220J demanding payment. If the employer does respond within the 30-day period, the IRS will respond with Letter 227 describing what further action the employer need take. If the employer still does not agree with the IRS position in Letter 227, it can request a pre-assessment conference with the IRS Office of Appeals. The IRS began issuing Letter 226J with respect to the 2015 calendar year late in 2017.4


      Planning Point: A significant amount of time may pass between the year in which coverage was offered and the date the employer receives their 226J letter. Applicable large employers began to receive notices regarding liability for 2016 via 226J letters issued in 2019. It is important that any employer who receives a 226J letter responds within the time frame listed in the letter. The deadline for response is usually 30 days after the letter was issued (employers may request a 30-day extension by calling a 4980H response unit number listed on the letter itself). It is important to get expert advice when drafting the response, but issues to consider include whether the IRS was using the correct data (i.e., was a corrected Form 1094 filed with the IRS in the year to which the letter relates?), whether the plan was a calendar year plan (transition relief may apply) and whether the employer did, in fact, offer minimum coverage during each month.


      After the employer’s response has been received, the employer may receive one in a series of Letter 227 documents from the IRS. Letter 227-J is used to acknowledge receipt of the employer’s completed Form 14764 (which the employer uses to indicate agreement or disagreement with the IRS’ calculation of the penalty) and no response is needed to this letter. Letter 227-K is issued if the employer’s penalty has been reduced to zero (no response is required). Letter 227-L will contain information regarding a revised penalty amount, and will show the information used to arrive at the revised penalty (i.e., a revised calculation table and an updated Form 14765). The employer can agree or request a meeting with respect to this information. Letter 227-M is used when the employer’s penalty amount did not change based on an initial disagreement, and provides the information used to arrive at this conclusion (the employer can agree or request a meeting). Letter 227-N acknowledges a decision reached on appeal, and shows the penalty amount based on that appeal (no response is required to this letter). The letter provided will explain the next steps that the employer is required to take in response (if a response is required) and will provide the relevant dates for providing any required response.5

      In a reversal of practice, in the early weeks of August of 2019, the IRS began issuing Notice 972CG to employers informing them that they owe substantial penalties for failing to strictly comply with the certain filing and reporting requirements related to the ACA employer mandate. Generally, the Notice is sent to inform employers that they have made late or incorrect filings of Forms 1094-C and 1095-C, and that penalties now apply (the notices sent in 2019 generally applied for mistakes made in 2017). The penalty that applied in 2017 was $260 per return ($50 per return if the filing was made within 30 days of the original due date).

      Employers must respond to the Notice 972CG within 45 days (from the date listed on the notice) or the IRS will bill the employer for the penalty amount listed. If the employer disagrees in whole or part with the proposed penalty, box B or box C of the notice should be checked and the employer must submit a signed statement detailing the disagreement, including supporting documentation if applicable. Generally, the employer will be required to explain that the late or incorrect filing was due to reasonable cause, meaning that the employer must show significant mitigating factors or demonstrate that the failure to comply arose from events beyond the employer’s control. Additionally, the employer must demonstrate that it acted in a reasonable manner before and after the late or incorrect filing occurred.


      1. See IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

      [2] Reg-109128-21.

      3. Notice 2020-76.

      4. IRS Q&A on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at https://www.irs.gov/affordable-care-act/employers/questions-and-answers-on-employer-shared-responsibility-provisions-under-the-affordable-care-act (last accessed Aug. 8, 2022).

      5. Understanding Your Letter 227, available at https://www.irs.gov/individuals/understanding-your-letter-227 (last accessed Aug. 9, 2022).

  • 8876. How long does the IRS have to assess the employer shared responsibility payment against an applicable large employer?

    • An IRS Chief Counsel Memorandum announced that the usually applicable three-year statute of limitations period does not apply with respect to ACA penalties for ALEs. In usual scenarios, when a taxpayer files a return reporting certain information to the IRS, that filing triggers the start of a limitations period after which the IRS can no longer challenge the information in that return (generally, three years). However, the IRS has now clarified that this rule does not apply with respect to ACA penalty taxes owed by applicable large employers–because there is no actual return that they file in order to report those taxes.

      This is the case despite the fact that ALEs have certain reporting obligations via annual Forms 1094-C and 1095-C. However, those forms only give the IRS the information needed to determine whether the ALE may owe a penalty tax–rather than calculating the amount owed itself. Additional necessary information is obtained from the health insurance exchange and taxpayers’ W-2s in order to determine whether a tax is actually owed. Therefore, Section 4980H penalty taxes can, under current guidance, be assessed against the employer indefinitely and even after the usual three-year period has expired.1


      1. IRC CCM 20200801F.

  • 8877. How does an employer who owes a shared responsibility penalty make a payment?

    • IRS guidance indicates that an employer who owes a shared responsibility penalty will not be required to include payment when it files its tax return for the year. Instead, the IRS will send a notice and demand for payment that includes payment instructions for the employer to follow.1

      1. See IRS Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

  • 8878. Are non-profit employers subject to the ACA shared responsibility provisions?

    • Yes. The shared responsibility provisions apply to all applicable large employers (those employers who employ an average of at least 50 full-time employees or full-time equivalents).1 This includes both for-profit and non-profit entities.2

      1. IRC § 4980H(c)(2)(A).

      2. See IRS Questions & Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

  • 8879. How are employees who work for two separate employers that are under common control treated in determining whether an employer is subject to the ACA shared responsibility provisions? 

    • The Affordable Care Act shared responsibility rules treat two or more employers that are under common control as a single employer for purposes of determining whether that employer is an applicable large employer so that the shared responsibility penalties may apply.1 As a result, all of an employee’s hours of service with each member of a group of employers that are under common control are added together in determining whether that employee is a full-time employee for purposes of applicable large employer status.

      Conversely, if the employee works for two employers who are not under common control, the employee’s hours of service with the first employer are not counted as hours of service with the second employer.2


      1. IRC § 4980(c)(2)(C)(i).

      2. See IRS Questions & Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, available at: http://www.irs.gov/Affordable-Care-Act/Employers/Questions-and-Answers-on-Employer-Shared-Responsibility-Provisions-Under-the-Affordable-Care-Act (last accessed Aug. 9, 2022).

  • 8880. When is an employer considered to be part of a controlled group for purposes of the ACA shared responsibility provisions?

    • Companies that have a common owner will generally be combined for purposes of determining whether an employer is subject to the ACA shared responsibility provisions.1 Whether or not a group of employers is treated as a single employer for ACA purposes is determined based upon the IRC Section 414 provisions that apply to aggregate certain employers for employment benefit purposes.

      An employer is part of a controlled group if it is a parent-subsidiary controlled group of corporations and:

      (1) stock possessing at least 80 percent of the voting power or value of all classes of stock in each of the corporations (except the parent) is owned by one or more of the other corporations, and

      (2) the common parent corporation owns at least 80 percent of the total voting power or value of at least one of the other corporations.2

      An employer is part of a brother-sister controlled group if five or fewer persons who are individuals, estates or trusts own stock possessing more than 50 percent of the combined voting power or value of all classes of stock of each corporation.3

      Rules similar to the rules discussed above are applied in determining whether an employer that is not a corporation is treated as a member of a controlled group for purposes of the ACA shared responsibility provisions.4 All employees of members of an affiliated service group are also treated as though employed by a single employer.5


      1. IRC § 4980H(c)(2)(C).

      2. IRC §§ 414(b), 1563(a)(1).

      3. IRC §§ 414(b), 1563(a)(2).

      4. IRC § 414(c).

      5. IRC § 414(m).

  • 8881. Prior to its appeal, what types of employer-provided health coverage were expected to be included in determining whether an employer was liable for the ACA Cadillac tax?

    • Editor’s Note: The SECURE Act repealed the Cadillac tax entirely late in 2019. The tax, discussed below, never went into effect.

      Preliminary IRS guidance indicated that many types of employer-provided health benefits (in addition to traditional health insurance premiums) would be counted in determining whether the employer would be subject to the ACA “Cadillac tax” on high cost health coverage. An employer was to become liable if it offered employer or salary reduction contributions to a health savings account (HSA) or health flexible spending account (FSA) that it administers.

      Pre-tax contributions to HSAs were likely to be included in determining whether an employee’s health coverage was subject to the Cadillac tax, but an employee’s after-tax contributions were not included in the calculation.

      The cost of health FSAs, Archer MSAs, HRAs, retiree coverage and multi-employer plan coverage were also expected to be included when calculating whether the threshold that triggers the Cadillac tax was crossed.1


      1. Notice 2015-16.

  • 8882. Can employment of summer interns cause an employer to become subject to the shared responsibility provisions?

    • Yes. However, in order to be counted as a full-time employee, an employee must be paid for his or her services—as a result, unpaid interns will not be counted as employees in determining whether an employer is subject to the shared responsibility provisions. An intern who is paid, however, will be counted in the same manner as any other employee.1 Therefore, a paid intern who works an average of 30 hours per week must be offered health coverage within the period of time that it would be offered to any other full-time employee.

      If the intern can legitimately be categorized as a seasonal employee (i.e, his or her duties are commonly only accomplished during a particular season), the employer may avoid offering health coverage to that intern. The employer can also avoid responsibility for offering health coverage to interns if the hours of those interns are capped at below 30 hours a week so that they are not treated as full-time employees under the ACA.


      1. See Preamble to the Final Regulations, TD 9655.

  • 8883. What determines whether health coverage offered by an employer is “affordable” under the Affordable Care Act?

    • For purposes of the premium assistance tax credit (see Q 8849), employer-provided health coverage is deemed to be “affordable” if the taxpayer’s required contribution toward the annual premium cost of self-only coverage does not exceed 9.5 percent (as indexed for inflation, 9.12 percent in 2023, 9.61 percent in 2022, 9.83 percent in 2021, 9.78 percent in 2020, 9.86 percent in 2019) of the taxpayer’s household income (see Q 8850).1


      Planning Point: From a practical perspective, the decrease in the affordability threshold means that the employer will be required to contribute more to avoid ACA penalties under the employer mandate.


      Any additional premium contributions that the taxpayer is required to make for family coverage are not included in determining whether the health coverage is affordable.


      Planning Point: So far, the IRS has yet to provide guidance on whether employers will be subject to new obligations under the proposed regulations that would fix the so-called “family glitch” for determining affordability under the ACA. There currently is not any new mandate for employers, so the employer’s obligations and penalty exposure would continue to be based on whether the employee’s self-only coverage is deemed affordable. However, it is possible that employers could become subject to additional reporting requirements in order to determine whether the health plan is affordable at the family level.


      If an employer offers multiple health plan options, the affordability test applies to the lowest cost plan in which the taxpayer is eligible to participate.2


      1. IRC § 36B(c)(2)(C)(i); Rev. Proc. 2020-36.

      2. IRS Questions and Answers on the Premium Tax Credit, Question 11, available at: https://www.irs.gov/affordable-care-act/individuals-and-families/questions-and-answers-on-the-premium-tax-credit (last accessed Aug. 9, 2022).

  • 8884. Does an employer’s contribution to a cafeteria plan or HRA impact whether health coverage is “affordable” under the Affordable Care Act?

    • The IRS has released final regulations that address the impact of employer contributions to cafeteria plans and health reimbursement arrangements (HRAs) upon the affordability of coverage and the employee’s required contribution toward health coverage.

      Pursuant to these regulations, an employee’s required contribution toward health coverage is reduced by the amount of any employer contribution to an IRC Section 125 cafeteria plan that (1) may not be taken as a taxable benefit, (2) may be used to pay for minimum essential health coverage and (3) may only be used to pay for medical care.1

      Employer contributions to an employee’s HRA are used in determining the level of the employee’s required contributions if the HRA is integrated with an employer-sponsored health plan and the employee is permitted to use the contributions to pay premiums. Further, the HRA amounts will count toward the employee’s required contribution if the HRA would have been integrated with an employer-sponsored plan if the employee had enrolled in the primary health plan offered by that employer.2

      The HRA funds are only taken into account in determining the employee’s required contribution if both the HRA and the primary health plan are offered by the same employer.3


      1. Treas. Reg. § 1.5000A-3(e)(2)(E).

      2. Treas. Reg. § 1.5000A-3(e)(2)(D). See also Notice 2013-54, 2013-40 IRB 287.

      3. Treas. Reg. § 1.5000A-3(e)(2)(D).

  • 8885. When does employer-sponsored health coverage provide “minimum value” for purposes of the Affordable Care Act?

    • Employer-sponsored health coverage provides “minimum value,” so that it also provides minimum essential coverage, if the plan covers at least 60 percent of the total allowed costs of benefits provided under the plan.1 Beginning in 2014, an employer that offers health coverage to its employees is required to provide each employee with a Summary of Benefits and Coverage, which is a document that explains the benefits provided under the plan and must also include a statement as to whether the plan provides minimum value.

      The Department of Health and Human Services and the IRS have provided guidance stating that a health plan that does not cover substantial hospital and physician services will not provide minimum value, and cannot satisfy an applicable large employer’s obligation to provide health coverage to avoid the shared responsibility penalties.2

      If an employee enrolls in a plan that does not provide minimum value, that employee is ineligible to claim the premium assistance tax credit even though the plan fails to provide the required coverage.


      1. IRC § 36B(c)(2)(C)(ii).

      2. Notice 2014-69, 2014-48 IRB 903.

  • 8886. Was there any transition relief for individuals with respect to the shared responsibility penalty provisions effective in 2014?

    • Editor’s Note: The shared responsibility penalty was reduced to zero for tax years beginning after 2018.

      Yes. If an individual is eligible to enroll in an employer-sponsored health plan that has adopted a plan year that is not a calendar year, the individual is eligible for transition relief from the shared responsibility penalty if the plan year began in 2013 and ended in 2014. The transition relief began in January 2014 and continued through the month in which the plan year ended.1 This rule was particularly important because many employer-sponsored health plans do not allow an employee to enroll in a plan after the beginning of the plan year. In the case of a 2013-2014 non-calendar year health plan, eligible employees would not be permitted to obtain the employer-sponsored coverage until after the start of 2014, when the shared responsibility penalty provision had already become effective. The transition relief prevented these taxpayers from becoming liable for the shared responsibility provision until the next plan year began in 2014.

      The IRS also provided relief for taxpayers who are covered under certain limited-benefit government-sponsored health plans which may not provide minimum essential coverage (examples of this type of coverage include optional family planning coverage and pregnancy-related services that are offered through Medicaid). This transition relief applied to months in 2014 in which an individual was covered by one of the specifically enumerated plans that did not provide minimum essential coverage.2


      1. Notice 2013-42, 2013-29 IRB 61.

      2. Notice 2014-10, 2014-9 IRB 605.