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The Affordable Care Act – Potential Employer Penalties (Part 5 of 8)
Beginning in 2014, an applicable large employer can be assessed a penalty if at least one of its full-time employees is certified to receive an “applicable premium tax credit” or “cost-sharing reduction” and the applicable large employer failed to offer its full-time employees and their (non-spousal) dependents the opportunity to enroll in affordable minimum essential coverage.
Large businesses may be assessed penalties in any month that:
1. The employer does not offer its full-time employees (and their non-spousal dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan; OR
2. The employer offers its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan but he plan is either (a) unaffordable relative to an employee’s income or (b) does not provide minimum value.
Beginning on January 1, 2014, the “Play or Pay” provisions become applicable and an employer may be accessed penalties for noncompliance. An applicable large employer not offering minimum essential coverage (the non-coverage penalty) is subject to a penalty in any month that any of its full-time employees received a premium tax credit. The monthly penalty assessed will be equal to the number of full-time employees, minus 30, multiplied by 1/12 of $2,000 for each applicable month. The first 30 full-time workers are excluded from the calculation.
There is also a penalty for applicable large employers offering coverage that is non-compliant with the Act. Employers offering health coverage will be subject to a penalty if at least one full-time employee obtains a premium tax credit in an exchange plan because (1) the employee’s required contribution for self-only coverage exceeds 9.5% of the employee’s W-2 income (not affordable) OR (2) if the plan offered pays less than 60% of covered expenses (doesn’t meet minimum value requirements). The monthly penalty assessed to the employer for each full-time employee who receives a premium tax credit is 1/12 of $3,000 for each applicable month, but total amount of this “Non-Compliant Coverage” penalty is “capped” or limited to the total number of the firm’s full-time employees, minus 30, multiplied by 1/12 of $2,000 for any applicable month. Employers with more than 200 full-time employees that offer coverage must automatically enroll new full-time employees in a plan.
The following examples demonstrate how a penalty may be accessed.
Example 1- An applicable large employer does not offer coverage, but no full-time employees receive premium tax credits for exchange coverage. No penalty.
Example 2 – An employer has 55 employees. The employer does not offer coverage and an employee receives a premium tax credit. Penalty? Yes, the annual penalty is the number of full-time employees minus 30, times $2,000. In this example the penalty wouldn’t vary if only one employee or all 55 employees received the credit; the employer’s annual penalty in 2014 would be (55-30) times $2,000 or $50,000.
Example 3 – An applicable large employer offers coverage and no full-time employees receive credits for exchange coverage. Penalty? No, there’s no credit to off-set.
Example 4 – An applicable large employer with 55 employees offers non-compliant coverage, and one or more full-time employees receive credits for exchange coverage. The number of full-time employees who receive the credit is used to calculate the penalty, which will be the lesser of:
1. The number of full-time employees minus 30, multiplied by $2,000 – or $50,000 for the employer with 55 full-time employees (55 minus 30, multiplied by $2,000). OR
2. The number of full-time employees who receive credits for exchange coverage, multiplied by $3,000.
Employers must remember that, unlike employer contributions to health insurance premiums, these penalties are not tax deductible. Further, if an employer decides to stop offering insurance, the amounts that had previously been deducted from wages for the employees’ portion of the premiums will now become subject to employer FICA contributions.