The Patient Protection and Affordable Care Act (PPACA or ACA) employer shared responsibility requirements include an employer mandate―pay or play―and a requirement to provide coverage that is affordable and of minimum value. Both provisions have penalty implications for employers with 50 or more full-time equivalent employees (large employers).
Employer Mandate or Pay or Play
Under the PPACA, the federal government, state governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States. The law does not require employers to offer health insurance but imposes penalties on large employers for not doing so.
Under the mandate, a large employer that does not offer health insurance coverage to substantially all (95 percent) of its full-time employees and their dependents could potentially be subject to a penalty tax (the so-called pay-or-play provision).
A penalty of $2,570 (for 2020) per full-time employee minus the first 30 will be incurred if the employer fails to offer minimum essential coverage to 95 percent of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange.
For example, if an employer with 150 employees does not offer health insurance to its full-time employees and their dependents, and if at least one full-time employee buys tax-subsidized health insurance through the marketplace exchange, the employer's penalty in 2020 will be $308,400 (150 - 30 × $2,570).
Providing Coverage That Is Affordable and of Minimum Value
If an employee's share of the premium for employer-provided coverage would cost the employee more than 9.78 percent (9.83 percent for 2021) of that employee's annual household income, the coverage would not be considered affordable for that employee. Because employers generally will not know their employees' household income, employers can take advantage of one or more of the three affordability safe harbors, set forth in the final regulations, that are based on information the employer will have available, such as the employee's Form W-2 wages or the employee's rate of pay.
A plan provides minimum value if it covers at least 60 percent of the total allowed cost of benefits that are expected to be incurred under the plan. Additional information on affordable and minimum-value coverage is found in the IRS Q&A on this topic.
An employer will be subject to a penalty if the employer-sponsored coverage is unaffordable or does not provide minimum value, and if one or more full-time employees receive subsidized coverage through an exchange. An employee may qualify for subsidized coverage through an exchange if his or her household income is less than 400 percent of the federal poverty level and the employer's plan is unaffordable or does not provide minimum value. The monthly penalty is equal to $3,860 (for 2020) divided by 12 for each full-time employee receiving subsidized coverage through an exchange for the month. However, the penalty will not be greater than the monthly penalty that would apply if the employer offered no coverage at all ($2,570 divided by 12, multiplied by the number of full-time employees employed during the applicable month, not counting the first 30 full-time employees). Only full-time employees, not full-time equivalents, are counted for purposes of calculating the penalty.
Additional PPACA requirements that include penalties for noncompliance:
- High-value plans. The Cadillac tax scheduled to take effect January 2022, which was included in the ACA but delayed several times from being implemented, was fully repealed in December 2019, preventing the tax from ever taking effect.
- IRS information returns. The PPACA imposes significant information-reporting responsibilities based on an employer's health plan and number of employees. This IRS Q&A provides information on reporting requirements and possible penalties.
The IRS is currently issuing ACA non-compliance penalties in Letter 226J for the 2017 tax year and is anticipated to continue issuing said notices through May this year, after which the agency will be moving onto the 2018 tax year. If you’ve received a Letter 226J for the 2017 tax year, please contact Independent Health Agents (312) 283-1807 on how best to respond.
If your organization is unsure of where it stands in regards to ACA compliance, contact us to have a cost-free ACA Penalty Risk Assessment performed.
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