How to Prepare for ACA Employer Mandates and Penalties for 2021

Back in November 2020, the Affordable Care Act (otherwise known as Obamacare) was back in the Supreme Court. While Republicans are again hoping to dismantle the act that provides healthcare to millions of Americans, it’s looking like the Affordable Care Act will be upheld.

Whichever way the Supreme Court goes plus the myriad of reactions that could take place afterwards, the best thing you can do as a small business owner is plan for it to be upheld in 2021. If things do change soon, there will no doubt be a scramble to figure out what’s next. If they don’t, however, you’ll be all set by understanding the ACA employer mandates and penalties for 2021 after reading this guide to what’s been changed for the coming year.

First of all, are you subject to the employer mandate?

Part of the ACA requires that any employers with 50 full-time or full-time equivalent (FTE) employees offer full-time employees and their eligible dependents health insurance. This insurance has to be at least what the IRS considers to be minimum essential coverage and it has to be affordable (hence the name).

If you have 50 or more full-time employees or equivalent, your small business is subject to the ACA employer mandate in 2021.

In 2021, this will mean that the premium for the health insurance you offer can’t be more than 9.83% of the employee’s household income. This threshold is sometimes referred to as the shared-responsibility affordability percentage or the cost-sharing limit. Whatever it’s called, the number is still the same for 2021. This is higher than 9.78% in 2020 but below the 9.86% rate in 2019. Of course, you can offer plans that cost employees more, but you have to have at least one option deemed affordable at the 9.83% metric for the coming year.

So, if you have 50 or more full-time employees or equivalent, your small business is subject to the ACA employer mandate in 2021.

Understanding the 2021 ACA penalties

If your small business is subject to the ACA employer mandate, you’ll either have to offer the minimum health insurance coverage required (or more!) or pay a tax penalty under Section 4980H of the IRS Tax Code. There are 2 parts to Section 4980H: Section 4980H(a) and 4980H(b).

The 4980H(a) penalty is incurred when an employer does not offer coverage to “substantially all,” which is interpreted as 95% of full-time employees and their dependents and at least one full-time employee receives subsidized coverage through the Exchange. This penalty comes to $2,700 a year multiplied by the number of full-time employees (minus up to 30). This is up from $2,570 from 2020.

The 4980H(b) penalty is incurred when an employer offers insurance but it doesn’t meet the affordability thresholds. This penalty comes to $4,060 a year per full-time employee, an increase from the $3,860 penalty for 2020.

Changes to ACA reporting

This year the IRS released drafts of the 1095-C Form and the 1094-C Form for comments. After all was said and done, the 1094-C Form remains the same, but there have been some changes to the 1095-C Form.

In 2021, the 1095-C Form has added space that amounts to a second page for new codes (1L-1S). This is to accommodate a 2020 addition of a new health reimbursement account (HRA). There is also a new Line 17 that asks for an employee’s primary ZIP code to help determine affordability. While this might mean that some employers will have to slightly change their tax reporting systems this year, the biggest difference is that it’s a 2-page form, doubling the costs associated with providing the form to employees.