What Are Small Business Health Insurance Requirements?

In this article, we break down the law and your responsibilities to offer healthcare as a business owner.


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Healthcare coverage is the No. 1 most sought after benefit by employees, and one of the most costly benefits to give as an employer.

A strong tool to attract and retain talent, healthcare insurance has become a “must-have” for job seekers and staff members.

But the cost of providing healthcare coverage continues to rise. As your business looks to see what type of health coverage to offer (if any), federal laws apply that may make the decision for you.

ACA and the employer mandate

When the Affordable Care Act went into effect in 2010, an employee mandate was enacted as well. In addition to requiring individuals to purchase coverage, under the ACA, employers with 50 or more full-time or full-time equivalent employees are required to provide “minimum essential coverage” that’s “affordable” to staff and their dependents.

While the individual coverage mandate was reversed, the employer mandate remains in effect.

For employers with 50 or more staffers, referred to as ALEs (applicable large employers), coverage must be offered to at least 95% of full-time staffers.

Failure to do so could result in penalties levied by the IRS. Breaking down the law and your responsibilities begin with understanding the terminology. Check the following definitions to see.

Applicable large employer

A business with 50 or more full-time or full-time equivalent employees.

Full-time employee

Any employee who works 30 hours or more per week or 130 hours per calendar month, including vacation and paid leaves of absence.

Full-time equivalent employee

This number is calculated by the number of hours worked every month by part-time employees (less than 30 hours per week) divided by 120

For Example:

  • 5 part-time employees work 20 hours per week = 100 hours
  • 100 hours x 4.33 (month) = 433
  • 433 ÷ 120 = 3.6 Full-time equivalent employees

Minimum essential coverage

Employers must offer coverage that meets the minimum essential requirements under the ACA.

Most group health care plans purchased through private companies comply with the law and all coverage plans purchased through the Health Exchange Marketplace meet the requirement. Some grandfathered and other plans also meet the minimum threshold.

When purchasing coverage, make sure it meets the minimum.

Minimum value health coverage

To meet the ACA threshold, coverage must pay at least 60% of the total medical costs for a standard population. Bronze, Silver, Gold and Platinum plans all meet or exceed a minimum value.

Most coverages purchased through private or through the Health Exchange Marketplace will meet this requirement but it’s important to verify when you purchase coverage that it meets the minimum value set under the ACA.

Affordable/affordability threshold

Affordability is another mandate of the law. Coverage must be affordable enough for staff members to participate. While employers may choose to pay for all or part of healthcare coverage, there’s a limit on the employee contribution.

For 2020, the lowest cost option for employee-only coverage cannot exceed 9.78% of the employee’s household income. Employees’ monthly contributions to the lowest-cost plan will be capped at $101.79 in 2020. This is also called the affordability threshold.

Rate of pay safe harbor

To determine whether or not coverage is affordable under the law, employers may use a “rate of pay safe harbor” calculation. There are several ways to calculate this, but the simplest is this:

Multiply the employee’s lowest hourly wage by 130, which is the ACA’s definition of the minimum number of hours that make the employee full-time or FTE.

Multiply that number by 9.78% for 2020. This number (capped at $101.79 for 2020) is the maximum monthly premium an employee can be required to pay. This number is the “rate of pay safe harbor.”

Note: the multiplier will change every year. 

FYI: There are 2 other acceptable ways to calculate affordability safe harbor: Federal Poverty Line (FPL) safe harbor and the W-2 Wages safe harbor.


Under the ACA, ALEs must offer coverage for full-time or FTE employees and their dependents up to age 26. However, providing coverage for spouses of the employee is not mandated under the law. Employers may opt to cover dependents (and/or spouses) on their plans but may do so at the employee’s expense. Businesses are not required under the ACA to pay for coverage for dependents, only the employee.

Healthcare reporting

The ACA also requires employers to report to the IRS every year to assure they’re complying with the employer mandate. These reports are Forms 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.

Form 1094-C reports summary information for each employer – a snapshot of what the employer has provided and paid for in the past year. The 1095-C report’s information about each employee. These must be filed by February 28, if by mail or March 31 if filing electronically and cover the previous years’ activities.

For SMBs filing fewer than 250 of 1095-C, they may be mailed. More than 250 forms must be filed electronically. Each employee must also receive a copy of 1095-C by January 31 for the previous calendar year

W-2 Reporting

In addition, a business must report the cost of any provided health benefits on employee W-2 Forms with the Social Security Administration. Businesses must include the amount of healthcare coverage on the W-2 using Code DD. This includes the total value of any medical, dental, vision coverage paid in the past year. Include the employer and employee cost, no matter who paid for the coverage.

IRS Penalties

Businesses that don’t comply with the ACA mandate could be subject to penalties levied by the IRS. ALEs that fail to offer coverage to 95% of their employees could be fined $2,570 per full-time employee beginning with the 31st employee (the first 30 are excluded) if one full-time employee receives subsidized healthcare coverage from the ACA Marketplace.

If the coverage offered fails to provide the minimum value and/or doesn’t meet the affordability threshold, there could be additional penalties. In 2019, employers paid  $3,860 for each full-time employee who received subsidized healthcare coverage from an ACA Marketplace because coverage didn’t meet minimum value or affordability.

In addition, failure to report on time or to accurately document compliance could also result in fines. The failure to file penalty for 2019 was $270 per return. This means for a company with 10 employees, the fine would be $2,700. The IRS now has levy power to take property and holding from business who don’t pay assessed penalties.

Navigating the law and requirements under the ACA for business can be complex. Healthcare.gov has many answers for small and medium-sized businesses. Many SMBs look for plans through the ACA marketplace or third-party providers to assure they’re getting the coverage they need to meet the requirements under the law.


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