Understanding employer shared responsibility

What you need to know

One-Year Postponement of the Employer Shared Responsibility Payments in 2014

On July 9, the Internal Revenue Service released guidance providing transitional relief until 2015 before some of the Affordable Care Act’s (ACA) employer and insurer reporting requirements go into effect. This transitional relief includes the tax penalties for failure to provide the required affordable health benefits coverage to employees. The Notice strongly encourages employers to voluntarily implement the ACA information reporting in 2014, in preparation for the full application of the provisions in 2015. However, any employer shared responsibility payments will not apply until 2015.

At a glance

Beginning January 1, 2014, the Affordable Care Act (ACA) requires employers with 50 or more full-time-equivalent employees to offer a defined level of coverage to full-time employees and their child dependents or face potential tax penalties. This provision is known as employer shared responsibility, or the employer mandate.

Full-time employees are those who work a monthly average of at least 30 hours a week or 130 hours a month. Part-time employees also count toward the 50-employee threshold, so you’ll need to calculate the number of full-time equivalents (FTEs) that they represent (see below). However, your part-time employees aren’t included in calculations of tax penalties. And part-time employees or child dependents receiving premium subsidies through health insurance exchanges don’t trigger any tax penalties for you.1

Calculating full-time equivalents

To determine if you meet the 50-employee threshold for any calendar year, you'll average your number of employees across the months in the year:

  • Write down the number of full-time employees who average at least 30 work hours a week or 130 work hours in a calendar month.
  • Calculate the number of full-time equivalents by adding total monthly hours of your part-time employees divided by 120.
  • Add these two numbers together to get your total number of full-time-equivalent employees for the month.
  • Repeat this calculation for every calendar month in the 12-month period.
  • Add all your calendar month totals together. Divide this number by 12 to determine your average monthly full-time-equivalent employee count.

What you need to know

Small business

  • Small businesses with fewer than 50 full-time-equivalent employees aren’t subject to employer shared responsibility obligations.
  • If you’re a larger small businesses with part-time workers — or a subsidiary of a larger organization — you may be subject to employer shared responsibility obligations.

Large business

Under employer shared responsibility, large group employers can avoid potential penalties by offering minimal essential coverage to full-time employees and their child dependents under 26 that:

  • covers at least 60% of expected costs for an average person or family
  • limits an employee’s share of the premium contribution to 9.5% of the employee’s income2
  • is available to at least 95% of its full-time employees or five of its full-time employees if that’s greater than 95% (and also offers that coverage to the employee’s child dependents)

If employers don’t offer minimal essential coverage that complies with the three bullets listed above for any calendar month, and any full-time employees are certified as eligible to receive a premium subsidy or cost-sharing reduction through Covered California, the employer penalty will be $2,000 per year multiplied by the number of full-time employees for each calendar month of the year minus the first 30 full-time employees.

If employers offer minimum essential coverage but it doesn’t meet the minimum value or affordability guidelines and any full-time employee is certified to receive a subsidy or cost-sharing reduction through Covered California, the employer penalty will be $3,000 per full-time employee certified as eligible to receive a premium tax credit or cost-sharing subsidy — up to a maximum of $2,000 per year for each full-time employee, minus the first 30 employees. This penalty will be calculated calendar month to calendar month.

There are some safe harbors in place to make this transition easier for you. For example, if you don’t currently offer dependent child coverage but begin to take steps toward that goal in 2014, then you can avoid potential penalties until 2015. To determine what your responsibilities are, contact your own legal counsel and tax and financial experts.

Learn more

What are the potential tax penalties?

An employer with 50 or more full-time-equivalent employees may be assessed a tax penalty if any of their full-time employees is certified to receive a premium subsidy or cost-sharing reduction through Covered California. Employees may be eligible for premium subsidies if their income is 400 percent of the federal poverty level or less and either:

  • no employer-sponsored health plan is available to them or
  • their employer-sponsored plan doesn’t cover at least 60% of the total expected medical costs for an average person, or requires employee premium contributions above 9.5% of their household income3

Q: If I’m assessed a penalty, how much will it be?

A: If you don’t offer coverage:

If employers don't offer coverage that complies with the requirements identified above, and any full-time employees are certified as eligible to receive a premium subsidy or cost-sharing reduction through Covered California, the employer penalty will be $2,000 multiplied by the number of full-time employees minus the first 30 employees.

Sample employer scenario
Juan’s company doesn’t offer health coverage for any calendar month of the year and employs 120 full-time employees in each calendar month of the year. Several of his employees get coverage through Covered California and receive a premium subsidy. Juan’s company will therefore pay a penalty of $2,000 for the year for each of his 120 full-time employees, subtracting the first 30. That’s $2,000 each for 90 employees, or $180,000.

If you do offer coverage:

If employers offer coverage for each calendar month of the year but the coverage doesn’t meet the defined requirements and a full-time employee receives a subsidy through Covered California, the employer penalty will be $3,000 per full-time employee certified as eligible to receive a premium tax credit or cost-sharing subsidy — up to a maximum of $2,000 for the year for each full-time employee, minus the first 30 employees. This penalty will be calculated calendar-month to calendar-month.

Sample employer scenario
Carol's company has 65 full-time employees each calendar month of the year and offers health coverage each calendar month of the year. However, 15 of these employees are certified for premium tax credits to get coverage through Covered California. Carol’s company will have to pay a penalty.

If Carol’s company paid $2,000 for 35 employees (each full-time employee excluding the first 30), the penalty would be $70,000. However, paying $3,000 for the 15 full-time employees receiving the premium tax credit would only be $45,000. Carol’s company would pay the lesser rate, $45,000 for the year.

Q: How will part-time employees factor into this provision?

A: Part-time employees also count toward the 50-employee threshold, so you'll need to calculate the number of full-time equivalents (FTEs) that they represent. However, your part-time employees aren’t included in calculations of tax penalties. And part-time employees or child dependents receiving premium subsidies through Covered California don't trigger any tax penalties for you.

To determine if you meet the 50-employee threshold for any calendar year, you’ll average your number of employees across the months in the year:

  • Write down the number of full-time employees who average at least 30 work hours a week or 130 work hours in a calendar month.
  • Calculate the number of full-time equivalents (FTEs) by adding total monthly hours of your part-time employees divided by 120.
  • Add these two numbers together to get your total number of full-time-equivalent employees for the month.
  • Repeat this calculation for every calendar month in the 12-month period.

Add all your calendar month totals together. Divide this number by 12 to determine your average monthly full-time-equivalent employee count.

Sample employer scenario

Susan's company has 35 employees working an average of 30 hours a week. She also has 40 employees who each average less than 30 hours a week but in total work 2,400 hours in a month. Together, these part-time employees count as 20 FTEs (2,400 total hours divided by 120). Add them to her 35 full-time workers and her business exceeds the 50-employee threshold under the employer mandate.

Q: What if I have seasonal employees?

A: Seasonal employees who work less than 120 days during the year don’t count toward this calculation.

For more information

For more about penalties under the employer mandate, check the Kaiser Family Foundation’s easy-to-understand flow chart.4

What are safe harbors?

The ACA enables employers to ease into the mandate through safe harbors — time periods in which employers can determine an employee’s full-time status without penalty. This can be especially important for employers using variable-hour or seasonal employees. These safe harbors are available through the end of 2014.

Q: What’s the first step in using the safe harbor approach?

A: You would first set a standard measurement period lasting 3 to 12 months. During this time, you can determine if employees meet the standards for full-time status.

Q: What’s the "optional administrative period"?

A: If you determine during the measurement period that an employee has full-time status, you may need time to notify and enroll that employee in an employer-sponsored plan. You can do this during an optional administrative period that immediately follows the measurement period and lasts up to 90 days.

Q: What follows the administrative period?

A: You would set a "stability period" during which employees who averaged 30 hours a week during the measurement period will be treated as full-time employees. The stability period must be a minimum of six months, and at least as long as the measurement period.

Sample employer scenario

Claire’s company has 250 employees, many of whom are variable-hour or seasonal workers. This makes it difficult to determine if they’ll be considered full-time employees for the employer mandate. Claire’s company opts to begin a nine-month measurement period starting January 1, 2013, to determine which employees may have full-time status under the new law.

When the measurement period ends on September 30, Claire’s company uses October 1 to December 29 as their administrative period, enrolling the necessary employees into the company’s health plan. Her company’s stability period would start in January 2014 and last through September 2014 to match the length of the measurement period.

Q: What about newly hired variable-hour and seasonal employees?

A: You can use a similar process for employees hired during the measurement period who are expected to be variable-hour or seasonal. In this case the cycle would start on their hire date. If it’s determined that they have full-time status, their coverage must begin within 13 months of their hire date.

Contact your broker or Kaiser Permanente representative with any questions or concerns.

The above does not constitute legal, tax, or financial advice. Employers should consult their own legal counsel and tax and financial experts for specific guidance related to these requirements. In all cases on this page, the requirements are applicable to the employers. No action is required of Kaiser Permanente.


1 The U.S. Department of Health and Human Services recently began referring to exchanges as health insurance marketplaces. Throughout this document, we refer to the more widely known term of exchange.

2 The Internal Revenue Service states that the percentage of household income calculation will be based on whether self-only coverage exceeds 9.5 percent of an employee’s W-2 wages from the employer.

3 See note 1.

4 The Kaiser Family Foundation is a nonprofit, private organization not affiliated with Kaiser Permanente.

* Kaiser Permanente is not responsible for the content or policies of external Internet sites.