When Do Employers Have to Offer Employee Health Coverage? Some Employers Pay Either Way

With healthcare costs predicted to rise sharply in 2024, some employers who don’t offer employees health coverage may be celebrating too soon. Depending on the size of their workforce, offering health coverage next year may be a requirement and not a choice. 

Workforce Size Matters

Under the Affordable Care Act’s (ACA’s) so-called ‘play or pay’ requirements, employers with an annual average workforce of 50 or more full-time employees (including full-time-employee equivalents) must offer their full-time employees ACA-compliant health coverage or risk an IRS penalty. Be aware that other penalties also apply to employer-offered health coverage that is not ACA-compliant. 

Workforce Size Mistakes

An employer who hits the play or pay threshold is an Applicable Large Employer (ALE). The ALE calculation is deceptively simple on paper: add the employer’s full-time employees to its full-time equivalent employees and divide by 12. As with most things ACA-related, it is more challenging than it appears.

Some mistakes employers make

• Not calculating workforce size. Ignoring the size of the employer’s workforce can result in unpleasant penalty surprises.
• Calculating workforce size at the wrong time. The ALE determination applies in any calendar year based on the average number of full-time employees and full-time equivalents during the preceding calendar year. For example, if an employer had an average of 50 or more full-time and full-time equivalent employees in 2022, they were required to offer health coverage in 2023. 
• Counting too many full-time employees. Full-time employee is defined very specifically and does not include every individual who might appear to be fully employed. For example, sole proprietors, partners in a partnership, and leased employees can be excluded.  Seasonal workers (special rules apply) and employees working outside the U.S. may also be excluded.
• Not counting employees who don’t work full-time. If an employee isn’t a full-time employee, their service hours must still be accounted for using a complex formula that considers whether the hours worked by non-full-time employees add up to the equivalent of a full-time employee. For example, three (3) employees each worked 40 hours in January for a total of 120 hours of service. There is one (1) full-time equivalent employee in January. 
• Misclassifying employees. The ALE threshold (and penalty) relies on the employer’s classification of its workforce (e.g., full-time, non-full-time, etc.). Outdated or incorrect information may throw the workforce count off and result in surprise penalties. Employee information should be current and consistent across all platforms, such as payroll and timekeeping, and those platforms should be kept up-to-date and accurate. 
• Not taking common or related ownership into account. Two or more businesses with a certain level of common or related ownership are generally treated as a single employer when calculating the ALE threshold. If the combined workforce total meets the ALE threshold, each separate business is considered to be part of the ALE and must offer health coverage, even if it doesn’t have enough employees to meet the ALE threshold on its own. 
• Not calculating the workforce during or after a merger or acquisition. Similarly, if a merger or acquisition creates a certain level of common or related ownership between two or more businesses, they will be treated as a single employer for the ALE threshold. Failure to discuss workforce count before or after a corporate transaction can result in surprise penalties.

It’s Really ‘Pay or Pay”

If the workforce math results in ALE status, the employer must pay for employee health coverage or risk paying a penalty. The penalties are not automatic; they are only imposed if a full-time employee buys an ACA Exchange plan and receives a federal subsidy to help pay for it. When those stars align, it can be pricey for the employer. The 2023 calendar year penalty for failure to offer health coverage is $2,880 per full-time employee (after a 30 full-time employee threshold). 

Employers of all sizes should:

Review. Stay up to date with the latest regulations and guidance regarding ALE requirements.

Evaluate. Regularly assess workforce size and ensure accurate recordkeeping.

Seek Professional Help. Consult with experts, such as benefit law attorneys, for guidance on compliance.