How the employer mandate will impact American businesses

Health Insurance

December 17, 2015

The upcoming year will bring about a powerful change to the healthcare system. That’s because in 2016, the long-delayed Employer Shared Responsibility Provision of the Affordable Care Act (or employer mandate) officially goes into effect. The mandate is one of the more controversial aspects of the Affordable Care Act (ACA). It requires larger businesses to provide health insurance to their employees. If not, they’ll face a financial penalty in 2016.

The employer mandate was originally set to begin in Jan. 2014 and was later postponed to Jan. 2015. These delays were necessary, as the many businesses required additional time to make the transition. But going forward, the penalty will be effective for the first plan year beginning on or after January 1, 2016.

Looking out for the smaller firms

In truth, most businesses will not even be affected by this mandate. About 96 percent of employers are small businesses, with fewer than 50 workers. These companies are therefore exempt. This is only fair, as higher health insurance costs have made it harder for small business owners to insure themselves and their employees.

A 2012 study showed that the nation’s smallest firms paid, on average, 18 percent more in premiums for the same benefits than the largest firms. These larger businesses really haven’t been affected by higher healthcare costs, as they have more leverage when buying large group health plans. And the employer mandate should be very beneficial for employees. Research suggests that an estimated 6 million people will gain insurance through employer-based health insurance, due to the mandate.

Breaking down the penalties

The employer mandate will only apply to those businesses with 50 to 99 full-time and full-time equivalent employees (FTE). And in total, only about 10,000 out of 6 million firms will actually be liable. Under the mandate’s requirements, all targeted businesses must provide health insurance to at least 95 percent of their FTEs and dependents, up to age 26. If not, these employers will face the penalty in 2016. The purpose of this mandate is to punish employers who either:

  • Offer no coverage at all. A penalty of $2,000 per FTE applies if one FTE receives federal premium Marketplace subsidies. For 2016 and beyond, employers can exclude 30 employees.
  • Offer coverage not meeting minimum value (60 percent of total allowed costs) and affordability standards. The penalty is the lesser of $3,000 per FTE receiving subsidies or $2,000 per FTE (minus the first 30).
  • The fee is always per month or 1/12 of those annual totals for each month.

In 2015, the total cost of single coverage for large businesses is about $11,304 per employee. Employees are asked to contribute 23.6 percent of the total healthcare premium, about $2,664, while average employee out-of-pocket costs are about $2,487. However, smaller businesses affected by the mandate can obtain premium tax credits through the Small Business Health Options Program (SHOP) Marketplace. SHOP provides lower costs and tax credits of up to 50 percent on group plans. In 2015, those employers with less than 50 FTEs qualify form SHOP, while in 2016, businesses with 100 FTEs qualify.