Employer Shared Responsibility Payment (ESRP) – ACA Penalties Explained
The Employer Shared Responsibility Payment (ESRP), often referred to as “ESRP”, is a penalty imposed by the IRS on Applicable Large Employers (ALE) who do not provide minimum value and affordable health coverage to their full-time employees under the Affordable Care Act (ACA).
In plain language: The ESRP is a fee that certain large businesses have to pay if they don’t offer health insurance that meets certain standards to most of their full-time workers. It’s part of the law known as the ACA.
Technical definition: Under the ACA, the ESRP (IRC Section 4980H) is a penalty that can be assessed on an ALE if they do not offer minimum value and affordable health coverage to at least 95% of their full-time employees and their dependents. The ESRP is assessed if at least one full-time employee purchases insurance through a state or federal exchange and receives a premium tax credit or cost-sharing reduction.
Many Applicable Large Employers may face unexpected penalties if not well informed about ACA regulations. The ESRP is a vital component of ACA compliance.
TL;DR
- The ESRP is a monetary penalty for large employers who don’t provide adequate, affordable health coverage.
- Understanding this penalty is crucial for ALEs to avoid unexpected costs and remain ACA-compliant.
- Many ALEs fail to adequately track and report their coverage, resulting in unwanted penalties.
- Regular review of healthcare offerings and workforce metrics are key best practices.
What Is Employer Shared Responsibility Payment (ESRP) in Insurance?
The ESRP is a component of the ACA designed to encourage large employers (ALEs) to provide minimum essential coverage that meets minimum value to their full-time employees. ALEs who do not offer such coverage may face penalties under IRC Section 4980H if one or more of their full-time employees receive a premium tax credit for purchasing coverage through a health insurance marketplace.
The ESRP falls under two categories – referred to as “A” and “B”. The “A” penalty applies if an ALE fails to offer minimum essential coverage to at least 95% of their full-time employees, and at least one full-time employee receives a premium tax credit in the marketplace. The “B” penalty applies if an ALE does offer minimum essential coverage to at least 95% of their full-time employees, but at least one full-time employee receives a premium tax credit in the marketplace because the employer’s offer was not affordable or didn’t meet the minimum value standard.
Key Related Terms to Know
- Applicable Large Employer (ALE) – A company that has an average of 50 or more full-time employees or full-time equivalents in the preceding calendar year.
- Minimum Essential Coverage (MEC) – The type of coverage an individual needs to meet the health coverage requirement under the ACA.
- Minimum Value – A health plan meets this standard if it’s designed to pay at least 60% of the total cost of medical services.
- Premium Adjustment Percentage – An annual percentage rate by the IRS (Rev. Proc. 2025-26) to determine affordability under several ACA provisions.
Common Questions About ESRP
How is ESRP penalty calculated?
ESRP penalty amounts are based on the number of full-time employees who receive a premium tax credit or cost-sharing reduction, and whether a qualifying offer of coverage was made. For example, if no coverage was offered, the annual “A” penalty calculation might be: $2,700 for each full-time employee, minus the first 30. The “B” penalty is calculated separately for each month at $3,860 divided by 12, for each full-time employee (minimum value is not affordable).
What do “Minimum Essential Coverage” and “Minimum Value” mean?
“Minimum essential coverage” refers to the type of coverage that meets the ACA’s requirement for having health coverage. ALEs must offer this coverage to at least 95% of their full-time employees. Coverage under an employer-sponsored plan generally meets this requirement.
“Minimum value” means that the health insurance coverage pays at least 60% of allowed costs, and includes substantial coverage of physician services and inpatient hospital services.
What is the role of the IRS in ESRP?
The IRS is responsible for ESRP enforcement. ALEs report offers of coverage to the IRS on Form 1094-C and 1095-C. If the IRS determines that a penalty is due, it will send Letter 226J to the ALE. The ALE then has an opportunity to respond and provide a correction report if necessary.
How are ALEs identified for ESRP purposes?
The determination of ALE status is based on the size of an employer’s workforce during the preceding calendar year. If the employer has 50 or more full-time workers or full-time equivalents during the prior year, they are considered an ALE for the current tax year.
ESRP vs. MEC
The core difference between ESRP and MEC (Minimum Essential Coverage) revolves around their roles in ACA compliance. While ESRP is a penalty for non-compliance, MEC is the required standard for health insurance coverage.
Comparison Area | ESRP | MEC
|
Primary use case | To penalize ALEs not offering required coverage | To set the standard for required coverage |
Coverage / concept type | Penalty | Coverage benchmark |
Typical exclusions | ALEs offering appropriate coverage | Coverage that does not meet set standards |
Who is most affected by errors | ALEs not offering required coverage | Employees with inadequate coverage |
Common mistakes | Misunderstanding of ACA regulations | Not meeting minimum coverage standards |
Real Claim Examples Involving ESRP
Scenario 1: A company did not offer any health insurance to its 200+ full-time employees. Several employees subsequently purchased insurance in the marketplace and received premium tax credits. Consequently, the IRS levied a large ESRP on the company for not offering minimum essential coverage to full-time employees.
Scenario 2: Another organization offered health insurance to all its full-time employees but did not meet the minimum value or affordability standards. When an employee purchased affordable coverage from an ACA marketplace and received a premium tax credit because the offered employer plan had no minimum value, the company received ESRP penalties from the IRS for ACA non-compliance.
Scenario 3: A company incorrectly classified some of their full-time employees as part-time. As such, these workers were not offered health coverage. When several of these employees obtained insurance from the marketplace and received premium tax credits, the company faced an ESRP from the IRS.
Limitations and Common Mistakes
- Not calculating employee hours accurately. Errors in counting full-time employees or equivalent can result in misclassification, leading to unanticipated ESRP for ALEs.
- Partial coverage. If an ALE does not offer coverage to at least 95% of its full-time workers, they stand to pay the full ESRP, even if coverage is provided to a large percentage of their workforce.
- Inadequate coverage. An ALE might offer health insurance to their workforce but not meet the “minimum value” ACA standard, leading to potential ESRP penalties.
How to Explain ESRP to Clients
Small Business owner “If you have 50 or more full-time or equivalent employees in your business, you may be considered a ‘large employer’ under the ACA law. If that’s the case, you need to provide health insurance that meets certain standards to these employees. If you don’t, and they find help to buy insurance elsewhere, you might have to pay a fee called the ESRP.”
CFO or Risk Manager “Ensuring rigorous compliance with the ACA law is essential. If our company is classified as an Applicable Large Employer (ALE) – meaning we average 50 or more full-time or equivalent employees – we must offer minimum value and affordable coverage to them. If not, and they receive a tax credit for getting insurance somewhere else, we’ll be hit with the ESRP. It’s a costly risk we must be aware of.”
Human Resources Manager “When we count our people, we must ensure to include all full-time employees and their equivalents. If our employees purchase coverage on their own because what we offer is not deemed affordable or doesn’t meet minimum value, we may have to pay the ESRP penalty. We need to be diligent about our compliance with these health coverage rules.”