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Small Business Employee Benefits and HR Blog

How to Adjust Employer Shared Responsibility (ESR) Fees for Inflation

If you are an Applicable Large Employer (ALE), then you are already aware of the How to Adjust Employer Shared Responsibility (ESR) Penalties for InflationEmployer Shared Responsibility (ESR) fees, more commonly known as the Employer Mandate. What you may not be aware of is that the penalties for not offering coverage, or not offering affordable coverage, are adjusted each year based on the premium adjustment percentage. This blog post will cover what the premium adjustment percentage is, and how it impacts your ESR fee, if you need to pay one.

What is the Premium Adjustment Percentage?

In a nutshell, the premium adjustment percentage is used to increase the amount of the ESR fee relative to the increases in the price of individual health insurance premiums due to inflation. So as U.S. inflation (slowly) drives up the cost of insurance premiums, the premium adjustment percentage will keep the price of the ESR penalty correspondingly high. 

To quote the language of the Department of Health and Human Services, "the premium adjustment percentage is the percentage by which the average per capita premium for health insurance coverage in the United States exceeds the average per capita premium for 2013."

What is it used for?

The premium adjustment percentage is used for more than just calculating the ESR fee. It is used to set the rate of increase for three parameters detailed in the Affordable Care Act:

  • The deductible and max OOP limits for small group and individual plans
  • To determine hardship exemptions from the Individual Mandate
  • The ESR Penalty amount

While the first two items above are taken care of by the government and the insurance companies, both you and your tax professional will want to be aware of how to adjust any Employer Shared Responsibility payments that you will be responsible for. You can find the premium adjustment percentage in the HHS Notice of Benefit and Payment Parameters, which is finalized in late February of each year.

To calculate the appropriate penalty amount, you will multiply the base penalty (either $2,000 or $3,000 for the year) by the premium adjustment percentage, and round down to the nearest $10 increment. For example, the premium adjustment percentage for 2016 was 8.3%, which would lead to either a $2,160 penalty for not offering coverage, or a $3,240 penalty for any employee for whom the coverage you offer is not affordable.

Conclusion

This is just one of the many moving pieces of the Affordable Care Act that you and your business advisors need to keep up with. If you are an Applicable Large Employer who will need to make an Employer Shared Responsibility payment, make sure that you incorporate the premium adjustment percentage when calculating your fee.

What questions do you have about the premium adjustment percentage and how it affects the ESR penalty? Let us know in the comments below. 

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