ACA Fact Sheet—Employer Shared Responsibility “Pay or Play” Provision for Applicable Large Employers

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

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.