As HR teams navigate Affordable Care Act (ACA) compliance each year, one question continues to surface: what are ACA subsidies, and why do they matter for employers?
ACA subsidies were created to make individual health coverage more affordable for consumers. But for employers, subsidies matter for a very different reason—because they trigger potential employer mandate penalties. Understanding how subsidies work helps employers protect their organization from unexpected compliance issues, inaccurate reporting, and IRS assessments.
Below is a clear breakdown of what ACA subsidies are, how they work, and what HR teams need to know.
What are ACA subsidies? (employer overview)
If you’ve ever wondered what are ACA subsidies in the context of employer responsibilities, here’s the simplest explanation:
ACA subsidies are financial assistance provided by the federal government to help individuals buy health insurance through the Health Insurance Marketplace. They come in two forms:
- Premium tax credits (PTCs/APTC)
- Cost-sharing reductions (CSRs)
These subsidies lower monthly premiums and reduce out-of-pocket costs for eligible individuals.
Why it matters to employers:
A full-time employee receiving a subsidy could indicate that your employer-sponsored coverage was either not affordable or not offered, which may lead to an ACA B-penalty.
How ACA subsidies work and why they matter to employers
ACA subsidies are available only through the Marketplace. When individuals apply, the Marketplace evaluates income, household size, and access to employer health coverage.
For employers, the implications are significant:
- If a full-time employee qualifies for a subsidy, the Marketplace notifies the IRS.
- The IRS compares this information with your 1095-C forms.
- If the employee should have been offered affordable, minimum value coverage—but wasn’t—you may face a B-penalty.
- If you didn’t offer coverage to at least 95% of full-time employees, you may face an A-penalty.
Understanding how subsidies are awarded helps employers reduce this risk.
When employees qualify for subsidies
While the exact subsidy formulas are more relevant to individuals, employers should understand the key factors influencing eligibility.
Income requirements (MAGI and FPL)
Subsidies are based on an employee’s Modified Adjusted Gross Income (MAGI) and percentage of the Federal Poverty Level (FPL). Employees within certain income bands may qualify—especially if employer coverage is unaffordable.
Affordability and benchmark plans
The Marketplace uses the cost of the second-lowest-cost Silver plan (the benchmark plan) to evaluate affordability.
If the employee’s share of your lowest-cost, self-only plan exceeds the ACA affordability percentage for the year, the employee may qualify for a subsidy.
When employees receive subsidies even if coverage is offered
Employees may still qualify for subsidies when:
- Your plan is not affordable under ACA guidelines
- Coverage does not meet minimum value
- The employee is part-time, seasonal, or otherwise not required to be offered coverage
- Dependent coverage is too expensive (even though the “family glitch” is mostly resolved)
Each scenario carries potential compliance implications.
How subsidies influence employer ACA compliance
ACA subsidies directly affect an employer’s obligations under the Employer Shared Responsibility provisions.
Employer mandate requirements
Applicable large employers must:
- Offer minimum essential coverage to at least 95% of full-time employees
- Ensure that coverage is affordable and provides minimum value
If these requirements are not met, employees may seek subsidized Marketplace coverage—leading to penalties.
Penalty exposure (A- and B-penalties)
- A-penalty: Applies when coverage is not offered to 95% of full-time employees and at least one full-time employee receives a subsidy.
- B-penalty: Applies when coverage is offered but is not affordable or does not meet minimum value, resulting in an employee receiving a subsidy.
Importance of accurate ACA reporting
Incorrect coding on 1095-C forms can trigger red flags or IRS inquiries, especially if they conflict with Marketplace subsidy records. Accurate reporting helps minimize this risk.
Special considerations for employers
ICHRA and subsidy rules
Employees cannot participate in an individual coverage HRA (ICHRA) and receive Marketplace subsidies. Employers offering ICHRAs must communicate these rules clearly.
Part-time, seasonal, and variable-hour employees
These workers often qualify for subsidies because employers are not required to offer them coverage. Proper hour tracking and classification are essential to avoid compliance problems.
Common subsidy-related scenarios for employers
Examples include:
- Incorrect affordability calculations
- Misclassification of an employee’s eligibility
- Delays in onboarding or coverage effective dates
- Marketplace determinations that conflict with employer records
These situations require careful monitoring and accurate data.
What employers can do to reduce subsidy-related penalties
Employers can lower their risk by:
- Ensuring plan affordability each year
- Maintaining accurate eligibility and payroll records
- Auditing employee contributions regularly
- Monitoring IRS updates to affordability thresholds
- Filing accurate 1095-C forms
- Leveraging a dedicated ACA reporting or filing service to reduce errors
Proactive compliance prevents penalties tied to employee subsidies.
Key takeaways
- What are ACA subsidies? They are financial assistance programs that help individuals afford Marketplace coverage.
- Subsidies matter to employers because they trigger employer mandate penalties if full-time employees receive them.
- Accurate reporting, proper tracking, and understanding subsidy rules helps employers stay compliant and avoid IRS assessments.
- Staying ahead of ACA requirements allows HR teams to focus on strategic benefits administration rather than costly corrections.
The information contained in this article is provided for informational purposes only and should not be construed as legal advice on any subject matter. The reader should not act or refrain from acting on the basis of any content included in this article without seeking tax, legal, or other professional advice. The contents of this article contain general information and may not reflect current legal developments or address the reader’s situation. ebm disclaims all liability for actions the reader takes or fails to take based on any content within this article.
