IRS Announces Decrease in ESR Penalties for 2025

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The IRS announced a decrease for 2025 to the applicable dollar amount used in calculating employer shared responsibility (ESR) payments under the Affordable Care Act (ACA). For 2025, the ESR payment amounts will be $2,900 for failing to offer minimal essential health care coverage and $4,350 for failing to offer affordable minimal essential health care, down from today’s $2,970 and $4,460, respectively, to accommodate for inflation.  

What is ESR? 

Under the ACA’s ESR provisions, applicable large employers (ALEs) must either offer minimum essential coverage that is “affordable” and provides “minimum value” to their full-time employees (and their dependents), or potentially make an ESR payment to the IRS. The same employers also have information reporting responsibilities regarding minimum essential coverage offered to employees. These responsibilities require employers to send reports to employees and the IRS. This information is filed on Forms 1094-C and 1095-C. If businesses do not furnish or file this information accurately and timely, they might be subject to reporting penalties.  

ESR Payments  

An ALE may be subject to one of two ESR payments, but not both. The first payment is for failure to offer minimum essential coverage, for any month it does not offer minimum essential coverage to at least 95% of its full-time employees (and their dependents), and if at least one full-time employee receives the premium tax credit for purchasing coverage through the marketplace. For 2025, the ESR payment annual amount will be $2,900 per employee, with the first 30 employees excluded from the calculation. This is owed on a month-by-month basis. An employer subject to this first type of ESR payment will not be subject to the second type of employer-shared responsibility payment described below. 

The second ESR payment is for failure to offer affordable minimum essential coverage that provides minimum value. Generally, a full-time employee will receive the premium tax credit on their marketplace coverage because the minimum essential coverage offered by their employer was not affordable, did not provide minimum value or because the employee was not one of the at least 95% of full-time employees offered minimum essential coverage. This payment is also calculated on a month-by-month basis. For 2025, this ESR payment annual amount will be $4,350 per employee. 

Based on information from the employer and employees’ tax returns, the IRS will calculate the potential ESR payment and contact the employer to inform it of any potential liability. The employer will then have an opportunity to respond before any assessment or notice and demand for payment is made. The IRS offers an ESR Provision Estimator to help employers understand how the provision works and learn what may apply to them.   

Takeaways for Employers  

Navigating this complex provision can be daunting. But doing it accurately the first time could save you a hassle in the long run. By working with a payroll provider familiar with the ever-changing ACA regulations, you can ensure you stay in compliance. With our automated tools, proactively manage and simplify all your ACA compliance efforts. We help you manage your pre-tax payroll health care coverage deductions, calculate your monthly full-time employee headcount and prepare 1094-C & 1095-C forms for regulatory filings and distribution to employees. Doeren Mayhew's payroll pros stand ready to help with your ACA compliance. 

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