Jeffrey Wade
The Affordable Care Act (ACA) provides subsidies to lower premiums and insurers offer plans with reduced out-of-pocket costs for eligible individuals. The ACA has specific requirements for employers regarding health care coverage, with the size and structure of the workforce determining the responsibility. The ACA also offers two types of financial assistance: the Premium Tax Credit, which reduces monthly payments for insurance coverage, and the Cost Sharing Reduction, which reduces out-of-pocket costs for medical services. The IRS and the Department of the Treasury have issued legal guidance on employer-provided health coverage, with employers allowed to use Form W-2 wages, an employee's rate of pay, or the federal poverty line to determine affordability.
| Characteristics | Values |
|---|---|
| Affordable Care Act | Provides sliding-scale subsidies that lower premiums and insurers offer plans with reduced out-of-pocket (OOP) costs for eligible individuals |
| Premium Tax Credit | A refundable tax credit designed to help eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace |
| Eligibility for Premium Tax Credit | Household income that meets certain requirements, not filed as Married Filing Separately (unless qualifying for a special rule), cannot be claimed as a dependent by another person, and not able to get affordable coverage through an eligible employer-sponsored plan |
| Affordability of Employer-Sponsored Plan | If the portion of the annual premium paid for self-only coverage does not exceed 9.5% of the household income (adjusted annually) |
| Affordability of Family Coverage | If the portion of the annual premium the employee must pay for family coverage does not exceed a certain percentage of the employee's household income |
| Forms | Individuals who purchased coverage through the Health Insurance Marketplace should receive Form 1095-A, which provides information needed for Form 8962 |
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What You'll Learn
- The Affordable Care Act (ACA) provides subsidies that lower premiums
- The ACA's cost-sharing reduction (CSR) lowers out-of-pocket costs
- Employers must offer affordable coverage to avoid penalties
- Employees can access affordable family coverage
- The IRS provides legal guidance on employer-provided coverage
The Affordable Care Act (ACA) provides subsidies that lower premiums
The premium tax credit reduces the monthly payments for insurance coverage. The amount of the premium tax credit is calculated by subtracting the individual's required contribution, which is set on a sliding income scale, from the actual cost of the "benchmark" plan. For example, if the benchmark plan costs $6,000 annually, and an individual has an income of 150% FPL ($22,590 in 2025), their required contribution is zero, resulting in an annual premium tax credit of $6,000. If the same person's income is 250% FPL ($37,650 in 2025), their contribution is 4% of their income, or $1,506 per year.
The cost-sharing reduction (CSR) is the second type of financial assistance available under the ACA. The CSR reduces enrollees' deductibles and other out-of-pocket costs when they visit the doctor or are hospitalised.
To receive either type of financial assistance, qualifying individuals and families must enrol in a plan offered through a health insurance marketplace and meet certain eligibility criteria. For the tax year 2025, these criteria include not having access to an affordable employer-sponsored plan that meets minimum value standards, not being eligible for Medicare, Medicaid, or the Children's Health Insurance Program (CHIP), and having U.S. citizenship or proof of legal residency.
Individuals who qualify for APTC and choose to have it sent directly to their insurer must file a federal income tax return and complete Form 8962, Premium Tax Credit (PTC). If their APTC is less than the premium tax credit, they will receive the difference as a higher refund or lower tax due. If their APTC is more than the premium tax credit, they may have to repay all or part of the excess APTC with their tax return.
The ACA has helped expand eligibility for affordable health coverage and reduce the number of uninsured individuals. As of 2024, 21.4 million people have selected an ACA marketplace plan, and 40 states and the District of Columbia have expanded Medicaid.
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The ACA's cost-sharing reduction (CSR) lowers out-of-pocket costs
The Affordable Care Act (ACA) provides cost-sharing reduction (CSR) as one of two types of financial assistance to eligible individuals and families who have purchased a health insurance plan on their own through health insurance marketplaces. The other type of financial assistance is the premium tax credit, which reduces enrollees' monthly payments for insurance coverage.
Cost-sharing reductions are payments made directly to insurers to lower costs for eligible individuals. Specifically, they allow individuals with incomes below 250% of the federal poverty level to purchase silver plans on the ACA exchanges that have a higher actuarial value (AV) than the standard 70%. The government pays insurers directly to lower deductibles and co-pays, resulting in higher AVs of 73%, 87%, or 94%. This means that eligible enrollees will have a lower "out-of-pocket maximum", reducing the total amount they would have to pay in a year if they required a lot of care. For example, instead of an out-of-pocket maximum of $5,000, a particular silver plan could have a maximum of $3,000.
CSRs are designed to be higher-value plans that limit out-of-pocket costs for low-income individuals. The ACA also requires insurers to offer these plans as a condition of participating in the exchanges, regardless of whether the government makes the CSR payments. This requirement to offer plans with higher AVs, even if CSR payments end, could significantly increase federal costs if insurance companies were required to subsidize cost-sharing for certain silver plan enrollees, as they would respond by significantly increasing silver plan premiums.
The uncertainty surrounding the continuation of CSR payments has made it more difficult for health plan actuaries to set premiums. If reimbursements were to be terminated, premiums would be too low to cover the cost of care, potentially leading to insurer losses.
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Employers must offer affordable coverage to avoid penalties
The Affordable Care Act (ACA) has specific requirements for employers regarding health care coverage. Employers with more than 50 full-time employees must offer affordable health insurance to their employees to avoid penalties. This is known as the employer shared responsibility provision.
The affordability of an employer's health plan is determined by comparing the premium cost to the employee's household income. For 2025, a plan is considered affordable if the premium is equal to or less than 9.02% of an employee's household income. This percentage is adjusted annually.
There are three safe harbors that employers can use to determine affordability: Form W-2 wages, an employee's rate of pay, or the federal poverty line. By using these safe harbors, employers can ensure they are offering affordable coverage and avoid penalties.
If an employer does not offer affordable coverage, they may be subject to a penalty if at least one full-time employee receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace. This is because the employee was not offered affordable coverage by their employer and therefore had to seek coverage elsewhere.
To assist employees in obtaining affordable health insurance, the Small Business Health Options Program Marketplace (SHOP) helps small businesses provide health coverage to their employees. SHOP offers flexibility, choice, and online application and account management.
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Employees can access affordable family coverage
The Affordable Care Act (ACA) has made it easier for employees to access affordable family coverage. Firstly, the ACA's employer mandate requires businesses with 50 or more full-time employees to offer health insurance to their full-time employees and their children. This coverage is considered affordable for the employees, but there is no requirement for the employer to fund any portion of the premiums for dependents. However, the average employer funds the majority of premiums even for family coverage.
The affordability rule for related individuals, as finalized in the 2022 regulations, ensures that family members of employees can access affordable, quality healthcare. This rule is consistent with the ACA's goal of providing access to affordable healthcare for all Americans.
In addition, the Small Business Health Options Program Marketplace (SHOP) helps small businesses provide health coverage to their employees. SHOP is open to businesses with 50 or fewer full-time equivalent employees, but some states may make it available to businesses with up to 100 employees. SHOP offers flexibility, choice, and online application and account management.
The ACA also provides sliding-scale subsidies that lower premiums and insurers offer plans with reduced out-of-pocket costs for eligible individuals. These subsidies are available to individuals and families who meet certain requirements, such as not having access to an employer plan that is considered affordable and having U.S. citizenship or proof of legal residency.
While the ACA has succeeded in providing affordable healthcare to millions, some still face challenges due to high premiums and out-of-pocket costs. However, with the "family glitch" fix finalized by the IRS in 2022, children might qualify for premium subsidies in the exchange, or they may be eligible for Medicaid or the Children's Health Insurance Program (CHIP) depending on income and location.
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The IRS provides legal guidance on employer-provided coverage
The Affordable Care Act (ACA) outlines the employer shared responsibility provisions, which apply to certain employers, known as applicable large employers (ALEs). ALEs are generally defined as employers with at least 50 full-time employees, including full-time equivalent employees, averaged over the preceding calendar year. These employers must either offer minimum essential health coverage that is "affordable" and provides "minimum value" to their full-time employees and their dependents or potentially face an employer shared responsibility payment to the IRS.
The IRS provides legal guidance and resources related to the employer shared responsibility provisions. This includes notices and regulations that offer transitional relief and clarify the application of various provisions of the ACA. For instance, Notice 2013-45 PDF announces transition relief for 2014, while Notice 2014-49 PDF addresses the proposed approach to the application of the look-back measurement method when the measurement period for an employee changes.
Additionally, the IRS offers online resources, such as the Applicable Large Employer Information Center, which provides the latest news and a list of resources for applicable large employers. The ACA Legal Guidance and Other Resources page is another valuable source of information, featuring YouTube videos, podcasts, and other outreach materials related to the employer shared responsibility provisions and other ACA topics.
To ensure compliance, ALEs are required to report specific information to the IRS and their employees. This includes details about whether health coverage was offered and, if applicable, information about the coverage provided. The forms used for this purpose include Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and Form 1095-C, Employer-Provided Health Insurance Offer and Coverage.
In summary, the IRS provides legal guidance and resources to help employers understand and comply with the employer shared responsibility provisions under the ACA. This guidance ensures that employers are aware of their responsibilities regarding the provision of affordable and valuable health coverage to their full-time employees and their dependents.
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Frequently asked questions
The Affordable Care Act (ACA) provides sliding-scale subsidies that lower premiums and insurers offer plans with reduced out-of-pocket (OOP) costs for eligible individuals.
The Premium Tax Credit is a refundable tax credit designed to help eligible individuals and families with low or moderate incomes afford health insurance purchased through the Health Insurance Marketplace.
You are eligible for the Premium Tax Credit if you meet the following requirements: have household income that meets certain requirements, do not file a Married Filing Separately tax return, cannot be claimed as a dependent by another person, and are not able to get affordable coverage through an eligible employer-sponsored plan.
If you are an employee and your employer offers you coverage, that coverage is generally affordable if the portion of the annual premium you must pay for self-only coverage that satisfies the minimum value requirement does not exceed 9.5 percent of your household income. This percentage is adjusted annually.
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