Checklist: Employer compliance with the Patient Protection and Affordable Care Act (USA)

Introduction

This checklist guides in-house counsel, private practice lawyers, and human resource professionals through the steps to take in order to ensure compliance with the Patient Protection and Affordable Care Act (ACA).

It covers the following steps:

1. Understand the operation of the ACA
2. Understand the requirements for compliance with the ACA
3. Evaluate the organization’s group health plan
4. Understand associated taxes and tax-favorable arrangements
5. Fulfilling required notice, reporting, and fee requirements

This checklist may be read in conjunction with How-to guides: Overview of US employment law, How to draft an employment contract and How to draft the key provisions of an employee handbook and Checklist: Compliance with child or spousal support orders.

Step 1 – Understand the operation of the ACA

Step 2 – Understand the requirements for compliance with the ACA

Step 3 – Evaluate the organization’s group health plan

Step 4 – Understand associated taxes and tax-favorable arrangements

Step 5 – Fulfill the required notice, reporting, and fee requirements

Explanatory notes

Legal framework

The Patient Protection and Affordable Care Act of 2010 (ACA) fundamentally reshaped the US healthcare system, introducing sweeping reforms to insurance coverage, cost structures, and access to care.. The ACA has been amended several times since passing and has been shaped by a number of court cases that have challenged various parts of it.

Key considerations

The ACA has an individual mandate that imposes penalties on individuals without health insurance coverage. It also has an employer mandate that uses a two-tier system, treating small businesses differently to large businesses. Employers with more than 50 full-time employees are required to offer minimum essential health insurance coverage to 95% or more of their full-time employees, or face penalties if they fail to do so. Smaller businesses are not required to offer health insurance coverage. Those that choose to do so must offer plans that provide minimum essential health insurance coverage.

Step 1 – Understand the operation of the ACA

The purpose of the ACA is to expand the public’s access to health care, improve the quality of the health care system, address rising health care costs, and expand the health care workforce.

1.1 Understand the employer mandate under the ACA

The ACA adopted a two-tiered system when it comes to business participation:

• Employers with fewer than 50 full-time or full-time equivalent employees may (but are not required to) participate in the Small Business Health Options Program, which helps employers provide health and dental coverage for employees (HealthCare.gov, Exploring Coverage Options for Small Businesses).
• Employers with 50 or more full-time employees – known as ‘applicable large employers’ (ALEs) – must either provide ‘minimum essential coverage’ that is affordable and provides minimum value, or make employer shared responsibility payments to the Internal Revenue Service (IRS).

An employer that is an ALE must also offer health insurance to the dependents of employees until the month in which any dependent turns 26.

Step 2 – Understand the requirements for compliance with the ACA

In order to ensure compliance with the ACA, the first step is to establish whether the employer is an ALE.

2.1 Establish whether the employer is an applicable large employer (ALE)

Employers fall under the ALE category if they have had 50 or more full-time or full-time equivalent employees over the preceding calendar year. For the purposes of the ACA, a full-time employee is defined as an employee who works an average of at least 30 hours per week in a calendar month (26 CFR 54.4980H-1(a)(21)(i)).

The number of full-time equivalent employees an employer has is calculated by determining the total number of hours worked by each non-full-time employee and dividing that number by 120 (26 CFR 54.4980H-2(c)(2)). Employers may round to the nearest one hundredth.

An employer not in existence in the preceding calendar year is considered a large employer if that employer is reasonably expected to have 50 full-time employees or full-time equivalent employees during the current year (26 CFR 54.4980H-2(b)(3)).

2.1.1 Exceptions

There are a number of exceptions to the full-time employment calculations and these are listed below.

Part-time and seasonal workers

Seasonal workers who were employed for fewer than 120 hours during the preceding calendar year are not counted for the purposes of identifying the 50 full-time employees or full-time equivalent employees.

Surface Transportation and Veterans Health Care Choice Improvement Act of 2015

This Act allows employers to exclude veterans who are eligible for treatment through the Veterans Administration when determining the employer’s status as an ALE (Surface Transportation and Veterans Health Care Choice Improvement Act, Pub L No 114-41, 129 Stat 443).

2.1.2 Employer Shared Responsibility Provision Estimator

Under Section 4980H of the Internal Revenue Code, employers must calculate their shared responsibility for medical coverage based on their number of full-time employees and the percentage of employees to whom the employer offers qualified health insurance (26 CFR 54.4980H-2(c)).

2.2 Determine whether the employer will offer group health plan coverage to full-time employees

An ALE is not required to offer health insurance to its employees, but it is subject to the shared responsibility provisions of the ACA (see Congressional Research Service publication – The Affordable Care Act’s (ACA) Employer Shared Responsibility Determination and the Potential Employer Penalty). These provisions do not require that an employer offers employees health insurance; however, there is a penalty imposed on an ALE if affordable coverage (see 2.3 below) that provides minimum value (see 2.4 below) is not offered to full-time employees (see IRS: Minimum Value and Affordability).

2.3 Understand the meaning of ‘affordable coverage’

Coverage for an employee under a qualified, employer-sponsored group health plan is affordable if the employee’s contribution for self-only coverage does not exceed 9.5% of the employee’s household income for the taxable year (Shared Responsibility for Employers Regarding Health Coverage, codified at 26 CFR pts 1, 54, and 301). Employers may use the following three methods to calculate an employee’s household income to determine whether coverage is affordable.

• Form W-2 wages – the employer may calculate if the coverage is affordable based solely on wages paid to the employee by the employer.
• Rate of pay – coverage is affordable if the premium to be paid by an employee does not exceed:
  • 9.5% of an amount equal to 130 hours multiplied by the employee’s hourly rate of pay (for hourly paid employees), or
  • 9.5% of the employee’s monthly salary, as of the first day of the coverage period (for non-hourly paid employees).
• Federal poverty line – an employer’s offer of coverage is treated as affordable if the employee’s contribution for a calendar month for lowest cost coverage does not exceed 9.5% of the monthly amount determined as the federal poverty line for a single individual.

2.3.1 Wellness incentive programs

The ACA includes incentives for employers to promote a healthier workplace by implementing an employee wellness program (Incentives for Nondiscriminatory Wellness Programs in Group Health Plans, codified at 26 CFR pt 54). Incentives for employers to implement wellness programs include reduced costs for health coverage for employers, which is conditional on their employees’ participation. Wellness programs must give eligible employees a chance for reward (such as a monetary award, additional paid time off, or reduced health insurance costs) at least once per year. Rewards must be available to all similarly situated persons, and the program must be reasonably designed to promote health or prevent disease. Examples of wellness incentive programs include:

• stress-reduction programs;
• weight-loss programs;
• smoking cessation programs;
• health risk assessments;
• health screenings;
• exercise programs and activities;
• nutrition education; and
• vaccination clinics.

2.4 Understand the meaning of ‘minimum value’

An employer-sponsored plan must provide minimum value to the covered employee (45 CFR 156.145(a)). Minimum value is achieved only if ‘the percentage of the total allowed costs of benefits provided under the plan is greater than or equal to 60 percent, and the benefits under the plan include substantial coverage of inpatient hospital services and physician services.’

There are four methods an employer may use to establish whether benefits are at least 60%:

• the minimum value calculator, available on the CMS Portal;
• safe harbors established by Health and Human Services and the IRS;
• certification by an actuary qualified under the American Academy of Actuaries; or
• any plan that meets a level of coverage set forth in section 156.140 of the federal regulations.

2.5 Be aware of the penalties for non-compliance with the ACA

There are two penalties that ALEs face if they fail to meet ACA requirements.

The first penalty applies if the ALE does not provide coverage for at least 95% of their full-time employees (see IRS: Employer Shared Responsibility Provisions). This is called the employer shared responsibility payment penalty and applies to:

• ALEs that fail to provide insurance entirely; and
• ALEs that provide minimum essential coverage to fewer than 95% of their full-time employees, if at least one full-time employee receives premium tax credit (ie, a tax credit that may be used to reduce the employee’s monthly insurance payment, or premium) for purchasing through the ACA Marketplace.

The employer shared responsibility payment penalty is $2,000 per full-time employee, with the first 30 company employees being excluded.

The second penalty applies if the employer fails to meet the minimum requirements of affordability and minimum value.

An ALE that does offer minimum essential coverage for 95% or more of its full-time employees is subject to penalties if at least one full-time employee receives a premium tax credit against their personal income tax for purchasing through the ACA Marketplace and that minimum essential coverage is:

• not affordable;
• the coverage the employer offered does not provide minimum value; and
• the employee is one of the 95% offered minimum essential coverage.

If the coverage is not affordable, or if it does not offer minimum value, the penalty is $3,000 for each full-time employee who receives the premium tax credit. This penalty is indexed annually for inflation.

The ACA Marketplace is a system that gives individuals access to affordable healthcare coverage through a competitive private health insurance market, where they can find and compare private health insurance options.

The IRS has issued the Questions and Answers about Information Reporting by Employers on Form 1094-C and Form 1095-C that provides more information about shared responsibility payments that may be assessed under the ACA.

Step 3 – Evaluate the organization’s group health plan

Steps should be taken to check that any existing health plan is ACA compliant.

3.1 Check whether the group health plan has grandfathered status

A grandfathered health plan is any plan that was in force before the implementation of the ACA in 2010 but continues to be in force. While such plans would not currently be allowed under the ACA, they are considered qualified if they meet certain criteria. Employers or the insurer must inform eligible employees if the company plan is grandfathered.

Grandfathered plans must maintain continuous coverage (45 CFR 147.140(a)(1)(i)). New members can join the plan, and existing members may leave it, but if the plan ceases to cover anyone it ceases to be a qualified plan under the ACA.

A plan also may lose its grandfathered status if the plan makes significant changes that either reduce benefits to policyholders or increase costs.

3.2 Review the group health plan documents for any necessary changes to benefits

A new or grandfathered plan is required to offer certain benefits, and to contain certain provisions, in order to be compliant with the ACA. While a new plan would likely be crafted by the insurer to be compliant with the ACA, the plan must still be reviewed by the employer to ensure that it will be in compliance.

Two key provisions applicable to both grandfathered and non-grandfathered plans are the prohibitions on waiting periods and on annual dollar limits.

Under the ACA, employers must not wait more than 90 days to offer health insurance to eligible employees (26 CFR 54.9815-2708(a)). Grandfathered plans must also abide by this timeline. Also, the ACA does not permit limits on how much insurers must spend for the coverage of a policy holder. Lifetime limits are also not permitted under grandfathered plans.

A significant provision of the ACA that does not apply to grandfathered plans relates to an insured’s pre-existing condition (45 CFR pt 152). A pre-existing condition is a medical or health condition of the insured that arose before the insured obtained coverage. Examples of pre-existing conditions may include impairments such as diabetes, sleep apnea, or cancer. Under the ACA, insurers cannot refuse to pay for pre-existing conditions. Grandfathered plans, however, are allowed to refuse coverage for pre-existing conditions.

3.2.1 Employer payment plans

Employer payment plans are plans under which employers compensate employees, in full or in part, for purchasing health insurance on the open market. Such plans may be against ACA policy and should be reviewed carefully by a qualified professional (see Guidance on the Application of Code section 4980D to Certain Types of Health Coverage Reimbursement Arrangements).

3.3 If the plan is non-grandfathered, check that out-of-pocket costs fall below dollar limits

The ACA sets limits on out-of-pocket expenses that must be paid by a covered person for any plan. Out-of-pocket limits refer to the maximum amount a covered person must pay for covered services during the plan year, and those limits change periodically (see Out-of-pocket maximum/limit). For 2025, the out-of-pocket limit is $9,200 for an individual and $18,400 for a family.

In a plan using multiple service providers, the out-of-pocket cost maximum does not change.

3.4 Ensure the plan covers the required preventative services

The ACA requires health plans offered by employers to provide coverage for four broad categories of preventative medicine (29 CFR 2590.715-2713(a)(1)):

• evidence-based screening and counselling;
• routine immunization;
• preventative services for women; and
• preventative services for children and young people.

3.5 Ensure the employer meets non-discrimination requirements

The ACA prohibits discrimination based on race, color, national origin, age, disability, or sex (45 CFR pt 92).

While employers may not discriminate on the basis of religion, some employers whose owners have religious objections to certain coverage (eg, coverage for contraception) are not required to provide coverage for those services (see Burwell v Hobby Lobby Stores, Inc, 573 US 682 (2014)).

On April 26, 2024, the Office for Civil Rights (OCR) issued a Final Rule under section 1557 of the ACA advancing protections against discrimination in health care. However, President Trump has since issued three executive orders revoking the Biden Administration guidance that extended nondiscrimination protections under section 1557 of the ACA to include gender identity.

These protections have had an unsettled history since Section 1557 was enacted in 2010, with each administration reversing the previous administration's stance. The current administration has returned to the position from President Trump’s previous term, stating that protections against discrimination ‘on the basis of sex’ do not cover gender identity. President Trump also revoked the March 2021 DOJ memo that applied the Supreme Court’s decision in Bostock v Clayton County, 590 U.S. 644 (2020), to Title IX and, by extension, Section 1557.

These actions, along with others from the current administration's early days, demonstrate that the Trump Administration will not interpret the protections of Section 1557 as extending to gender identity. In addition, on January 28, 2025, President Trump issued another executive order concerning gender-affirming care for children, defined as those under 19 years of age. Section 1557 is expressly mentioned in this regard. The executive order also rescinded the March 2022 HHS OCR guidance memo titled ’HHS Notice and Guidance on Gender Affirming Care, Civil Rights, and Patient Privacy.’

The Supreme Court's recent decision in US v Skrmetti, Docket No. 23-477 (July 21 2025) upheld the constitutionality of Tennessee's ban on gender-affirming care for transgender minors. The majority opinion held that the ban in the law was not sex-based discrimination, but was based on the age of the patient, and the type of medical treatment at issue. The Court also held that the Tennessee law does not deny any individual medical treatments on the basis of transgender status. Instead, the law removes one set of diagnoses—gender dysphoria, gender identity disorder, and gender incongruence—from the list of conditions that may be treated.

Step 4 – Understand associated taxes and tax-favorable arrangements

In addition to the requirements of the ACA, there are a number of associated tax arrangements that employers should be aware of, which may allow employers to fund employee health care coverage whilst avoiding the need to administer a complex health plan.

4.1 Consider a health reimbursement arrangement (HRA)

A health reimbursement arrangement (HRA) is an employer-funded group health plan that reimburses employees for qualified medical expenses up to a certain amount (45 CFR 146.145(b)(3)(viii)). Reimbursements in qualified arrangements are tax free. Such plans can take many forms, with the employer and employee splitting the deductibles in various ways and the HRA covering the balance of the benefits.

A HRA gives small employers (50 or fewer full-time employees) the ability to pay health care expenses, such as premiums and coinsurance, for employees who maintain minimum coverage (26 USC 9831).

4.2 Consider flexible spending arrangements (FSAs)

A flexible spending arrangement (also known as flexible spending account) (FSA) is a spending account to which employees and their spouses may contribute in pre-tax dollars to pay health care related expenses (45 CFR 146.145(b)(3)(v)). Eligible expenses include coinsurance, deductibles, and co-payments.

Employees may contribute only a certain amount per year to an FSA (IRS Rev Proc 2022-38, Sec 3.16). The 2025 cap is $3,300 per year for each employee and employers may allow each employee to carry over up to $660 per year to be used the following year. For employees who are married, the employee’s spouse may also contribute up to the $3,300 limit, but that contribution must be made under the spouse’s own FSA with their employer.

4.3 Consider cafeteria plans

A cafeteria plan is a tax-exempt plan that allows employees to receive certain qualified benefits through a pre-tax deduction (26 USC 125). Qualified participants must be allowed to choose from benefits such as accident and health benefits, adoption assistance, dependent care assistance, group-term life insurance, and health savings accounts.

4.4 Ensure the employer withholds additional Medicare tax for high earners

An additional Medicare tax of 0.9% applies to certain high-income earners to help fund the ACA (IRS, Topic No 560, Additional Medicare Tax). High-income earners are those who report an adjusted gross income of more than $250,000 for married taxpayers filing jointly, over $125,000 for married taxpayers filing separate returns, and over $200,000 for all other taxpayers (see IRS Topic No 560).

Step 5 – Fulfill the required notice, reporting, and fee requirements

The notice and reporting requirements, and the fees for employers, are set out below.

5.1 Provide employees and their dependents with a health insurance exchange notice

Employers covered by the Fair Labor Standards Act are required to provide employees with a health insurance exchange notice (also referred to as a ‘marketplace notice’ or ‘notice of coverage options’) within 14 days of the employee’s start date. The notice gives information about the health insurance marketplaces available in the state (29 USC 201, et seq). The marketplaces allow individuals to purchase ACA-compliant coverage. They are maintained by state governments, the US government, or a state–federal partnership. The notice should also inform employees that:

• depending on their income and what coverage may be offered by the employer, they may be able to get lower cost private insurance in the marketplace; and
• if they buy insurance through the marketplace, they may lose the employer contribution (if any) to their health benefits.

5.2 Provide employees and their dependents with a summary of benefits and coverage (SBC) and, if applicable, a notice of material modification

A summary of benefits and coverage (SBC) is an overview of a health plan’s costs, benefits, covered health care services, and other features that are important to consumers (Understanding the Summary of Benefits and Coverage (SBC), Fast Facts for Assisters). SBCs also explain a plan’s unique features, such as cost-sharing rules and significant limits or exceptions to coverage. Along with the SBC, group health plans and health insurance companies must also provide a uniform glossary to explain common medical and insurance-related terms. The employer must provide employees and their dependents with an SBC as soon as possible following their application for health care coverage, but no later than seven days following receipt of the application (Summary of Benefits and Coverage and Uniform Glossary, codified at 26 CFR pt 54, 29 CFR pt 2590, 45 CFR 147).

Employers are obligated to provide employees with notice of material modifications to their health plan at least 60 days prior to the effective date of any such modifications. A notice of material modification must be provided in situations including the following:

• if a modification occurs at any time other than at coverage renewal;
• if a modification impacts the content of the SBC; or
• if the most recent SBC does not reflect new information.

5.3 Ensure reporting requirements are fulfilled

Every provider of minimum essential coverage (such as a group health plan) must report coverage information to the IRS each year (26 USC 6055). The report is in the form of an informational return (IRS Form 1094-C). The report must include information about the provider (eg, name, address, and employer ID number), the name and address of the individual responsible for making the report, as well as the phone number of that individual’s contact person, the name and birth date of each person covered and the type of coverage provided.

All employers that are ALEs must report coverage information and must also provide copies of the information reported to the IRS to each employee. The same information is required from employers as is required from providers of coverage.

5.3.1 Cost of coverage reporting

Employers that provide coverage through group health plans are required to record certain annual health care expenses (eg, major medical and hospital costs, etc) on the employee’s W-2 Form (Form W-2 Reporting of Employer-Sponsored Health Coverage). Employers must provide copies of the reported information to each employee by March 31^st.

5.4 Consider hiring a third party to fulfill reporting requirements

Some employers may find it advisable to retain a third party to make the annual reports. This third party may be an accountant, who can advise on the tax implications of the coverage offered by the employer and may be able to suggest other options; or they could be an insurance expert, who may likewise know of alternative ways of complying with the ACA. Employers who are offering coverage for the first time (eg, an employer that has recently become an ALE) may wish to use a third party at least for the initial reporting.

5.5 Ensure all applicable reporting deadlines are met

The deadline to file hard-copy reports with the IRS is February 28 in the year following the year in which coverage was provided. The deadline is March 31, if filed electronically (see Information Reporting of Health Insurance Coverage and Other Issues).

5.6 Ensure all applicable fees and distributed rebates are paid

5.6.1 Patient-Centered Outcomes Research Institute (PCORI) fees

The Patient-Centered Outcomes Research Institute Fee (PCORI Fee) is a fee of $2 for every life covered by most health insurance policies (26 USC 4375(a)). PCORI is an independent, nonprofit research organization that funds comparative clinical effectiveness research (CER), which compares two or more medical treatments, services, or health practices to help patients and other stakeholders make better-informed decisions. The fee is due annually (see 26 USC Sect 4375).

5.6.2 Medical Loss Ratio (MLR) rebates

The ACA requires insurance companies to spend at least 80% of premium dollars on medical care. In years that the insurance company does not meet this percentage, they are required to return part of the premium to employees in the form of cash or premium rebates (45 CFR 158.240).

Depending on how the money is returned, this may be a taxable event.

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