As the core components of the employer shared responsibility provision, applicable large employers (ALEs) must offer healthcare that meets minimum essential coverage (MEC) requirements to 95 percent of their full-time employees and their dependents. For the 2015 tax year, the threshold was 70 percent and increased to 95 percent for 2016 and beyond.
If you failed to meet these guidelines or you did not complete your IRS forms correctly, your company could be subject to penalties that could swell into the millions and stack up from each month and year you are out of compliance. In fact, the IRS continues to use Letter 226-J to notify employers who may not have complied with section 4980(a) and (b) of the Employer Shared Responsibility provision of the ACA Employer Mandate that they could be assessed a penalty.
Today we wanted to give you a deeper dive into ACA penalties so you can use this information to help understand your risk and keep your company ACA compliant.
Penalty A: Not offering minimum essential coverage to substantially all employees
As we said above, the expectation is that ALEs will extend an offer of coverage that is at least MEC to at least 95 percent of their full-time employees and dependents. Those who don’t face an Employer Shared Responsibility Payment commonly referred to as Penalty A.
The key to avoiding Penalty A (if you choose to do so) is to accurately determine who must be considered full-time and therefore eligible for benefits under the ACA. This can be much more complicated than it sounds.
Under the law, a full-time employee is one who averages 30 or more hours of service per week or 130 hours per month. If the employee is reasonably expected to work more than 30 hours a week, the employee and his/her dependents must be offered coverage within 90 days of hire. If the employer is unable to reasonably determine that the employee will work over 30 hours a week, then the employee may be classified as a variable-hour employee. In this case, there are two options for measurement of full-time status for variable hour employees: monthly and look-back measurement.
For 2020, the financial impact of a Penalty A violation is $2,570 per full-time employee. The penalty is assessed for each month an eligible employee is not offered coverage, which in 2020 amounts to $214.17 per employee per month.
There is no penalty for the first 30 full-time employees, with the credit applied proportionately across all ALE Members within a reporting control group.
For example, for an ALE with 5,000 employees, Penalty A for non-compliance for 2020 would be calculated as follows:
Penalty B: Employers that offer coverage to their full-time employees, may offer coverage that doesn’t provide minimum value and/or is also unaffordable
Employers are also subject to fines if they fail to offer affordable coverage that provides at least minimum value coverage and is considered a qualified health plan to full-time employees (even if the ALE does offer MEC to at least 95 percent of its full-time employees) and at least one full-time employee receives a premium tax credit through the Health Insurance Marketplace. This portion of the Employer Shared Responsibility Payment is often referred to as Penalty B.
Penalty B is calculated for every FT employee who was not offered affordable minimum value coverage by their employer, who went to the Health Insurance Marketplace and qualified for a premium tax credit. The $3,860 penalty per year is multiplied by the total number of full-time employees who receive a premium tax credit or subsidy on the exchange (Note: the legislation indicates the employer payment is $3,000, and is adjusted for inflation each year). Similar to Penalty A, this penalty can be assessed for each month an eligible employee is not offered coverage, which in 2020 amounts to $321.67 per month.
For example, let’s look at an employer with 5,000 employees. If 100 ACA full-time eligible employees who were not offered minimum value coverage and/or the coverage was not affordable under one of the three safe harbor options receive a premium tax credit or subsidy on the exchange, Penalty B would be calculated as follows:
The financial implications associated with Penalty B are capped at the Penalty A maximum, so the company will not need to pay more than would have been assessed for not offering any coverage.
Other penalties and considerations
While Penalties A and B certainly carry the most attention because of their significant potential financial implications, they are not the only penalties your company could be exposed to in instances of non-compliance.
For example, if a company fails to deliver mandated copies of Form 1095-C to all employees by January 31, (unless the date is extended by the IRS), it could be exposed to a fine of $280 per form that is not delivered.
Dates are also important to remember when it comes to IRS filing of Forms 1094/1095 (for ALEs with 250 or more FT employees). For the 2020 reporting year, all forms must be filed with the IRS by March 1, if filing on paper, or March 31, if filing electronically. If these forms are not filed by the IRS deadline, an ALE could face a fine of $280 per form. If failure with intentional disregard is determined, the fine will escalate to $560 per form.
Finding support to mitigate your risk
Complying with the ACA mandate means juggling several moving pieces. However, this is one task your company can’t afford to ignore. The potential financial costs of doing so are simply too great.
At Health e(fx) we can help. The dashboard functionality of our system provides you monthly visibility into your ACA compliance. For larger employers with multiple ALE Member entities, there is also the ability to view compliance levels on an individual by individual ALE Member basis. In addition, organizations can use our technology to conduct a deeper assessment into potential risks within different segments, locations, and populations.
Health e(fx) also assists large employers ward off potential Penalty B concerns with reports that provide insight into the risks created by unaffordable plans and MEC-only plans that do not meet the minimum required value.
From increased visibility and tracking to expert insight and updates on the latest changes in the ACA, your compliance plan is out there and Health e(fx) can help you find it. To learn more, contact us today.