Why Applicable Large Employers Must Offer Affordable, Minimum Value Health Plans

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For Applicable Large Employers (ALEs), offering health insurance that meets the standards of affordability and minimum value to full-time employees isn’t just a best practice—it’s a legal requirement under the Affordable Care Act (ACA). Failing to meet these standards can result in significant penalties, making it important for ALEs to understand and comply with these rules.

What Is an Applicable Large Employer (ALE)?

An ALE is an employer with 50 or more full-time employees (or full-time equivalents) during the previous calendar year. ALEs are subject to the ACA’s employer mandate, which requires them to offer health coverage to at least 95% of their full-time employees (and their dependents) to avoid penalties.

What Does “Affordable” Mean?

Under the ACA, a health plan is considered affordable if the employee’s share of the premium for the lowest-cost self-only coverage does not exceed a specific percentage of their household income. For 2024, this threshold is 8.39% of household income. For 2025, the percentage is 9.02%.

Because employers typically don’t know employees’ household income, the IRS provides three affordability safe harbors based on:

1. W-2 Wages: Coverage is affordable if the premium is 8.39% (9.02%) or less of an employee’s Box 1 W-2 wages.
2. Rate of Pay: For hourly employees, coverage is affordable if the monthly premium doesn’t exceed 8.39% (9.02%) of the hourly rate multiplied by 130 hours.
3. Federal Poverty Line (FPL): Coverage is affordable if the employee’s premium is 8.39% (9.02%) or less of the federal poverty line for a single individual.

What Is Minimum Value Coverage?

A health plan meets the minimum value standard if it covers at least:

1. 60% of total allowed costs of covered benefits (similar to a bronze plan on the ACA Marketplace).
2. Substantial coverage of inpatient hospital and physician services.

Employers can use the IRS Minimum Value Calculator or consult their benefits advisor to ensure their plan meets this requirement.

Why Is Compliance Important?

If an ALE fails to offer affordable, minimum value coverage to full-time employees, they risk being subject to Employer Shared Responsibility Payment (ESRP) penalties:

• Penalty A: Applies if the employer doesn’t offer coverage to 95% of full-time employees, and at least one employee receives a premium tax credit on the ACA Marketplace.
• Penalty B: Applies if the employer offers coverage that is unaffordable or does not provide minimum value, and at least one employee receives a premium tax credit.

The Bottom Line

Meeting affordability and minimum value standards helps ALEs comply with the ACA, avoid penalties, and provide valuable benefits that attract and retain employees. Employers should regularly review their health plan offerings with a benefits advisor to ensure they remain compliant with changing thresholds and requirements.