ACA Compliance Requirements and Penalties
To be clear, the Affordable Care Act (ACA), does not require employers to provide health insurance for their employees.
However, there can be penalties for businesses with 50 or more full-time or full-time-equivalent employees who don’t offer affordable health insurance coverage to employees.
2027 ACA Affordability: What Colorado Employers Need to Know
If you have fewer than 50 full-time and full-time equivalent employees, the ACA employer mandate does not apply to you. No affordability test, no minimum value requirement, no potential penalty. Most Colorado businesses we work with fall into this group, and the 2027 numbers below are simply not your problem.
That said, two things make this worth five minutes of your time. First, the 50-employee threshold is easier to cross than most owners expect. Second, if you are close to it, you want to know the rules before you are subject to them, not after.
Are You an Applicable Large Employer?
An Applicable Large Employer (ALE) is an employer that averaged 50 or more full-time and full-time equivalent employees during the prior calendar year. Part-time hours count toward that number. They are converted into full-time equivalents, which is why businesses with a large part-time or seasonal staff sometimes land above 50 even when they think of themselves as small.
Two details catch Colorado employers off guard:
- Common ownership counts. If you own or control multiple businesses, the IRS generally combines them under Section 414 controlled group rules and treats them as one employer for the ALE count. Three companies with 20 employees each can add up to one ALE.
- It is a look-back test. Your 2027 status is determined by your 2026 headcount. If you are growing through this year, you may become an ALE on January 1, 2027 without doing anything differently.
The IRS explains the calculation here: https://www.irs.gov/affordable-care-act/employers/determining-if-an-employer-is-an-applicable-large-employer
If you are not an ALE, you can stop here. You are free to offer benefits, and most of our clients do, but you are doing it to attract and keep good people, not to satisfy a federal mandate.
What ALEs Must Offer
If you are an ALE, the employer mandate requires you to offer affordable coverage that meets minimum value to your full-time employees and their dependents, or potentially face a penalty.
Minimum value means the plan pays at least 60 percent of the total allowed cost of expected benefits and substantially covers inpatient hospitalization and physician services. Nearly every major medical plan sold in Colorado clears this bar. Affordability is where employers actually get tripped up.
The 2027 Affordability Numbers
For plan years beginning in 2027, at least one of your plan options must cost an employee no more than 10.22% of household income for self-only coverage. Since you do not know your employees’ household income, the IRS gives you three safe harbors to use instead.
Federal Poverty Level Safe Harbor
The simplest of the three. It is one flat dollar figure that applies to every employee, so there is nothing to calculate per person.
For plan years beginning January 1, 2027 through June 1, 2027, you automatically satisfy affordability if you offer at least one plan where self-only coverage costs the employee no more than $135.92 per month. That is the figure Colorado employers use.
For plan years beginning July 1, 2027 or later, you must use the 2027 federal poverty guidelines, which are expected to be released in early 2027. The rule allows you to use the guidelines in effect six months before your plan year starts, so a later plan year means a different, and likely higher, dollar amount.
Rate of Pay Safe Harbor
In 2027, self-only coverage cannot exceed 10.22% of the employee’s monthly salary, or for hourly employees, 10.22% of their hourly rate multiplied by 130. This is predictable and works well when your wages are comfortably above minimum.
W-2 Safe Harbor
Self-only coverage cannot exceed 10.22% of the employee’s W-2 wages for the year. We generally steer clients away from this one. You do not know the final W-2 number until the year is over, which means you do not know whether you passed until it is too late to fix. The other two safe harbors let you confirm compliance before your plan year begins.
You can apply different safe harbors to different reasonable classes of employees, and you are not locked into the same choice year over year.
The Bottom Line
Under 50 employees: this does not apply to you. Design your benefits around what your people actually need and what your budget supports.
At or approaching 50 employees: run your full-time equivalent count now, before your 2027 plan year is set. If you are an ALE with a January 2027 plan year, $135.92 per month for self-only coverage is the number to design around.
If you are not sure which side of the line your business falls on, we will run the count with you and show you what your options look like either way. There is no cost for this and no obligation.
Request a free quote or a benefits review:
Calculating Number of Full-time Equivalent Employees
According to a newer IRS ruling, employers need to calculate their employees’ hours of service every month for a minimum 6 month period before January 1st and that a “common law employee” is one that averages 30+ hours of service per week for any given month.” So, the key is if the full-time employees plus the common law employees that average 30+ hours of service per week for any given month is greater or less than 50. For more details on this please see this FAQ from the IRS on calculating the number of full-time equivalent employees or use Healthcare.gov’s FTE calculator.
ACA Notification Requirements for Employers
- Employers are required to provide employees with a standard Summary of Benefits and Coverage (SBC) form explaining what their plan covers and what it costs. You can find the SBC’s for non-grandfathered plans here.
- Employers are required to report the cost of coverage under an employer-sponsored group health plan in box 12 on W-2 forms. Keep in mind that this does not mean that the coverage is taxable. See the IRS documentation for more info.
Employers, HRA’s and Payment of Individual Plan Premiums
2017 guidance confirms that HRAs can be used with individual insurance under ACA requirements.
Under the 21st Century Cures Act, signed into law in 2016, small employers can fund or reimburse for employees’ medical expenses, including coverage on the individual market on a pre-tax basis.
Only small employers with fewer than 50 full-time employees may offer Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Small employers who offer QSEHRAs may not offer a group health plan to any of their employees.
Reimbursement payments to employees are capped at $4,950 for individual employees or $10,000 if family members are on the plan and the caps will be indexed annually for inflation.
Small employers must also provide employees with a notice which includes the amount the eligible employee receives in the QSEHRA for the year; a statement that the eligible employee should provide this information to an exchange when applying for advance premium tax credit; and, a statement that if the employee is not covered under minimum essential coverage the employee may be liable for an individual mandate penalty and the QSEHRA amount may be included in the employee’s gross income (and hence taxable).
According to the Department of Labor’s 2017 guidance, the 21st Century Cures Act states that “Qualified Small Employer Health Reimbursement Arrangement” (QSEHRA) is an arrangement offered by an eligible employer that meets the following criteria:
- The arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement
- The arrangement provides, after the employee provides proof of coverage, for the payment to, or reimbursement of, an eligible employee for expenses for medical care (as defined in Code section 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the terms of the arrangement).
- The amount of payments and reimbursements described in (2) for any year do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee) (with amounts to be indexed for increases in cost of living); and the arrangement must be provided on the same terms to all eligible employees of the eligible employer.
The statutory exclusion of QSEHRAs from the group health plan definition is effective for plan years beginning after December 31, 2016.
To be an eligible employer that may offer a QSEHRA, the employer may not be an applicable large employer (ALE) as defined in Code section 4980H(c)(2) (and thus may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year) and may not offer a group health plan to any of its employees.
There are many additional rules and regulations that must be adhered to. The US Department of Labor’s Compliance Assistance Guide provides a wealth of information for business operators.
Or let us assist your company as your Broker. Get a group health insurance quote and more information about ACA requirements, HRA’s and more.
The information and materials on this page are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided may not reflect the most current legal developments and may vary by jurisdiction. The content is for general informational purposes only and does not apply to any particular facts or circumstances. This website’s contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction.