March 14, 2014

The Affordable Care Act and Nonprofit Organizations: An Overview

3 min

This article was originally published on GuideStar on March 14, 2014.


What are the implications of the Affordable Care Act (ACA) for nonprofit organizations? Are there any exceptions for employer-based insurance coverage for nonprofit organizations that struggle to provide for this financially?


The employer health coverage mandate is designed to require “applicable large employers” including nonprofit organizations meeting this definition, either to provide employees with affordable, minimum value health coverage or to pay certain penalties for their failure to do so. Specifically, penalties are triggered if:

  • (1) An employer fails to offer all of its “full-time employees” and their dependent children the opportunity to enroll in an employer-sponsored health plan; or (2) the employer-sponsored health plan offered to “full-time employees” is “unaffordable” or fails to provide “minimum value;” AND
  • Any employee impacted by such a failure enrolls in health coverage and qualifies for a subsidy through an exchange.1 

In the event that an employer becomes subject to the no coverage penalty, the employer is generally required to pay a monthly penalty of $166.67, $2,000 annually, (adjusted for inflation) multiplied by its total number of full-time employees (excluding the first 30). For purposes of this rule, “full-time employees” include those individuals working 30 or more hours per week. The IRS has issued complex proposed regulations for the purpose of identifying these individuals.

Even if an employer offers health coverage to its full-time employees (and their children), it can be subject to penalties if that coverage is deemed “unaffordable” or does not provide “minimum value.” Specifically, the employer is required to pay a monthly penalty of $250, $3,000 annually, (adjusted for inflation) multiplied by the number of full-time employees who purchase health insurance through an exchange and receive a government subsidy (if income eligible). Generally, coverage is defined as “affordable” if the required employee contribution towards self-only coverage is not more than 9.5% of the employee’s household income. Note that this affordability calculation does not take into account the cost of covering an employee’s spouse or dependents. A plan fails to provide minimum value if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of those costs.

There are no exceptions to the employer mandate for nonprofit organizations, regardless of their financial status. However, many nonprofit organizations will be able to take advantage of the exemption from the employer mandate for small businesses. As noted above, the employer mandate only applies to “applicable large employers.” An “applicable large employer” is defined as “an employer that employed an average of at least 50 full-time employees (including full-time equivalent employees) on business days during the preceding calendar year.” The total number of employees for this purpose is equal to the total full-time employees for each month in the preceding calendar year; plus total number of full-time equivalent employees (calculated by totaling the hours worked by part-time employees and dividing that total by 120) for each month in the preceding calendar year; divided by 12. If the result of this calculation is less than 50, the employer is not subject to the employer mandate. One important caution—the IRS’s controlled group rules apply when counting employees for this purpose. Therefore, if you nonprofit organization is related to other organizations, it is important to engage in a controlled group analysis before concluding that it is not subject to the employer mandate because it is not an “applicable large employer.”

1 Individuals/families with income above the Medicaid eligibility limit, but less than 400% of the federal poverty level may qualify for a subsidy. For 2013, this amount is $45,960 for an individual and $94,200 for a family of four.

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Thora Johnson is partner at Venable LLP where she focuses on tax-exempt organizations, employee benefits and executive compensation matters.