Employer Shared Responsibility Payment

What is Employer Shared Responsibility Payment?

The employer shared responsibility payment is a federal assessment imposed on certain businesses under the Affordable Care Act when they fail to offer adequate and affordable health insurance to full-time employees. This requirement is part of the broader framework commonly referred to as shared responsibility for employers, which ensures that large businesses contribute to employee access to health coverage. The IRS may assess an irs shared responsibility payment if at least one full-time employee receives a premium tax credit through the Health Insurance Marketplace. The rules have been in effect since 2015 and continue to evolve annually due to inflation-adjusted penalty amounts. Although sometimes confused with the individual shared responsibility requirements that once applied to taxpayers, the ESRP is a separate employer-focused mandate.

To remain compliant, employers must understand federal definitions, reporting obligations, affordability standards, and minimum value requirements. The ESRP does not require employers to offer the most generous coverage; instead, they must offer the lowest-cost plan that meets ACA minimum standards to at least 95% of their full-time workforce. Businesses subject to these provisions must also be familiar with related issues such as State and Local Tax Issues, payroll reporting nuances, and benefits administration systems like Sage Intacct, which can support data tracking for ACA compliance.

How Does the ESRP Affect Applicable Large Employers?

The ESRP applies specifically to Applicable Large Employers (ALEs), which arebusinesses with 50 or more full-time and full-time equivalent employees. An ALE must offer health coverage meeting two core requirements:

1. Minimum Essential Coverage (MEC) is offered to at least 95% of full-time employees (30 hours or more per week).
2. Affordability and Minimum Value Requirements, meaning:
   1. The employee’s share of the lowest-cost self-only plan cannot exceed the IRS affordability percentage for the year.
   1. The plan must cover at least 60% of total allowed costs (minimum value).

If an ALE does not meet either requirement, and even one full-time employee obtains subsidized Marketplace coverage, the employer may owe an ESRP. Because penalty assessments occur after the IRS receives year-end ACA reporting, an ALE may first learn of an issue through IRS Letter 226J, which outlines potential liabilities. Employers must review and respond to these notices carefully, especially when operational details, seasonal hiring, or controlled group rules complicate the ALE determination. Mistakes in classification, documentation, or affordability calculations can expose a business to penalties or prompt an IRS Audit.

How Is the Employer Shared Responsibility Payment Calculated?

The ESRP consists of two separate potential penalties, each calculated differently:

1. No Coverage Offered (Section 4980H(a) Penalty)

If an ALE fails to offer minimum essential coverage to at least 95% of full-time employees and at least one employee obtains a Marketplace subsidy, the penalty is calculated as:

• (Total full-time employees – 30) × annual penalty amount
• For 2025, the annual penalty amount is $2,900

For example, an ALE with 150 full-time employees that fails to offer compliant coverage could face:
 (150 – 30) × $2,900 = $348,000.

2. Coverage Offered but Not Affordable or Not Minimum Value (Section 4980H(b) Penalty)

If an ALE offers coverage but it is either unaffordable or fails minimum value, the penalty applies only for each full-time employee who receives subsidized Marketplace coverage. The calculation is:

• (Number of subsidized employees) × annual penalty amount
• For 2025, the annual penalty amount is $4,350

However, this penalty is capped: It cannot exceed what the employer would have owed under the first penalty. This ensures that offering partially compliant coverage never costs more than offering no coverage at all.

Because ESRP penalties adjust annually for inflation, employers should review updated IRS guidance each year to avoid unexpected liabilities. Detailed internal payroll and benefits records are crucial for calculations and filings.

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How to Avoid ESRP Penalties

Avoiding ESRP penalties requires a proactive compliance strategy rooted in accurate workforce classification, benefits design, and annual monitoring. Key steps include:

1. Confirm ALE Status Annually
    Even businesses near the 50-employee threshold must evaluate full-time equivalent counts to determine ALE status each year.
2. Offer Coverage to at Least 95% of Full-Time Employees
    Consistent onboarding processes and accurate hour-tracking systems help ensure eligible employees receive timely offers of coverage.
3. Monitor Affordability
    Use IRS-approved safe harbors, W-2 wages, federal poverty line, or rate-of-pay to determine affordability. Update calculations annually to reflect new thresholds.
4. Ensure Minimum Value Standards
    Work with qualified benefits professionals to confirm plan designs meet ACA minimum value requirements.
5. Maintain Accurate ACA Forms (1094-C and 1095-C)
    Accurate and timely reporting reduces exposure to penalties and prevents common errors that may trigger an ESRP notice.
6. Respond Promptly to IRS Correspondence
    Employers should never ignore a Letter 226J. Timely and well-supported responses can correct errors or resolve discrepancies before they become liabilities.
7. Use Reliable Systems for Recordkeeping
    Platforms such as Sage Intacct can help track hours, coverage offers, and safe-harbor calculations, supporting smoother compliance.

FAQ

Who is required to pay the Employer Shared Responsibility Payment?

ALEs with at least 50 full-time and full-time equivalent employees may be required to pay the ESRP if they fail to offer adequate, affordable coverage. The payment only applies when at least one full-time employee receives subsidized Marketplace coverage. Companies below the ALE threshold are not subject to these rules, regardless of whether they offer health insurance.

What triggers an Employer Shared Responsibility Payment?

An ESRP is triggered when an ALE either fails to offer minimum essential coverage to 95% of full-time staff or offers coverage that is unaffordable or fails minimum value. If even one full-time employee secures a premium tax credit through the Marketplace because of these failures, the IRS may assess a penalty using ACA reporting data.

Can an employer appeal an ESRP assessment from the IRS?

Yes. Employers can appeal ESRP assessments by responding to IRS Letter 226J with documentation supporting their case. This may involve correcting reporting errors, demonstrating compliance, or supplying payroll and plan records. Employers must adhere to response deadlines to preserve appeal rights. If unresolved, the case may proceed through the IRS administrative process.

How does the Employer Shared Responsibility Payment relate to employee health coverage?

The ESRP directly ties employer obligations to employee access to affordable health insurance. If a full-time employee cannot obtain affordable, minimum-value coverage from their employer and receives subsidized Marketplace coverage instead, an ESRP may apply. This structure incentivizes employers to maintain ACA-compliant health plans and timely coverage offers for eligible employees.