The 95% Rule: A Small Eligibility Mistake May Create a Big ACA Problem

For Applicable Large Employers (ALEs), Affordable Care Act compliance involves more than offering a health plan. Employers also need to make sure coverage is offered to enough of the right employees at the right time.

Under the ACA employer shared responsibility provisions, an ALE generally must offer minimum essential coverage (MEC) to at least 95% of its full-time employees and their dependents each month to avoid potential penalties under Internal Revenue Code Section 4980H(a). For this purpose, an ALE is generally an employer that averaged at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

The 95% requirement can make seemingly routine eligibility and administrative errors much more significant than employers may realize.

What Does the 95% Rule Require?

For ACA purposes, a full-time employee is generally an employee who averages at least 30 hours of service per week or 130 hours of service per month. Employers may use the monthly measurement method or, where permitted, the look-back measurement method to determine full-time status.

The 95% test is applied on a monthly basis. An employer that satisfies the requirement for some months of the year but falls below 95% in another month can have potential exposure for the month in which the threshold was not met. ACA reporting reflects this monthly approach, with Form 1094-C requiring an ALE member to indicate whether it offered MEC to at least 95% of its full-time employees and their dependents for each month.

It is also important not to confuse the 95% rule with ACA affordability or minimum value requirements. The 95% test asks whether MEC was offered to a sufficient percentage of full-time employees and their dependents. Whether that coverage was affordable and provided minimum value involves separate ACA requirements.

Small Administrative Problems Can Add Up

An employer may intend to offer coverage to every eligible full-time employee and still fall below the 95% threshold because of administrative problems.

Common examples include:

• A new full-time employee is not added to the benefits system when eligible.
• An employee changes from part-time or variable-hour status to full-time status, but the change is not reflected in benefits eligibility.
• An employee is incorrectly coded as terminated.
• A rehired employee is not timely restored to benefits eligibility.
• An employee returning from leave is not handled correctly.
• Hours information is incomplete or inaccurate, resulting in an incorrect full-time determination.
• An eligibility file contains rejected records that are not identified and corrected.
• HR, payroll, and benefits systems contain inconsistent employment information.
• A payroll or HRIS conversion results in missing employee or historical hours information.
• An employer using the look-back measurement method fails to properly recognize an employee’s full-time status during the applicable stability period.

Individually, these may look like ordinary administrative errors. Collectively, they can affect whether the employer satisfies the ACA’s 95% requirement.

How Much Room Does 95% Really Provide?

Consider an employer with 100 ACA full-time employees. If six full-time employees who should have received offers of coverage are inadvertently missed, the employer has offered coverage to only 94% of its full-time employees.

There is a special rule that can help smaller employers. For purposes of this test, an employer that offers coverage to all but five full-time employees and their dependents can generally be treated as satisfying the requirement even when those five employees represent more than 5% of its full-time workforce. IRS reporting instructions give the example of an employer offering coverage to 75 of 80 full-time employees and still being able to report that it satisfied the 95% standard.

The rule nevertheless should not be viewed as permission to intentionally exclude 5% of full-time employees. The 95% standard provides some protection against limited gaps in coverage offers, but accurate eligibility administration remains important.

Why Falling Below 95% Matters

The potential financial consequences are what make the rule particularly significant.

If an ALE member does not offer MEC to at least 95% of its full-time employees and their dependents, and at least one full-time employee receives a premium tax credit for Marketplace coverage, the employer may become subject to the Section 4980H(a) employer shared responsibility penalty.

Importantly, this penalty is generally based on the employer’s overall number of full-time employees, subject to the applicable statutory reduction, rather than simply the number of employees who were not offered coverage.

That is different from the potential Section 4980H(b) penalty. An employer that meets the 95% threshold may still have potential liability if a particular full-time employee receives a premium tax credit because that employee was not offered coverage or the coverage offered was unaffordable or failed to provide minimum value. In that situation, the potential penalty is generally tied to the affected full-time employees who receive premium tax credits rather than the employer’s entire full-time population.

ACA Compliance Is a Year-Round Process

The 95% rule is another reason employers should not think of ACA compliance as something that happens only when Forms 1094-C and 1095-C are prepared.

HR and benefits teams should periodically compare employment and benefits information, including new hires, terminations, rehires, changes in employment status, leaves of absence, hours worked, and coverage effective dates. Eligibility file errors and rejected transactions should also be investigated promptly rather than waiting until ACA reporting season.

By the time an employer discovers a missing coverage offer while reviewing its Forms 1095-C, the underlying eligibility issue may have occurred many months earlier. For employers who use BAS’ ACA data collection and reporting service, BAS provides monthly reports on whether the 95% threshold has been satisfied.

Good ACA reporting starts with good eligibility administration. Regularly reviewing the employees who should be receiving an offer of coverage can help employers identify discrepancies early and reduce the likelihood that a small administrative mistake becomes a much larger ACA compliance problem.