Employee Benefits Compliance, Large Employers, Penalties

Penalties Under Employer Shared Responsibility

by Lisa Klinger, J.D. and Susan Grassli, J.D.
 
This is an updated and revised version of the prior article on the same topic, which was posted on Feb. 9, 2015.  The penalty amounts of $2,000 and $3,000 annually have been indexed for inflation and in 2016 are $2,160 and $3,240  (2015 amounts were $2,080 and $3,120).
 

There are two possible penalties under the Employer Shared Responsibility (ESR) provisions:   the IRC section 4980H(a) penalty and the 4980H(b) penalty. Neither penalty applies unless at least one full-time employee purchases health insurance in a Health Insurance Marketplace (originally called an Exchange) and qualifies for a subsidy (a cost-sharing reduction and/or a premium tax credit).  An “applicable large employer” (ALE) can be subject to only one penalty, not to both of them, and the 4980H(b) penalty cannot be greater than the amount of the 4980H(a) penalty if it applied. The two types of penalties are:

The IRC 4980H(a) Penalty

The IRC 4980H(a) penalty is the original $2,000 annual penalty ($2,160 in 2016).  An employer who does not offer “minimum essential coverage” (MEC) to at least 95% of its full-time employees and their dependents may be subject to a penalty.  The penalty is calculated monthly.  The annual penalty is the sum of 12 months of penalties.  The monthly penalty is $180 per month times the total number of eligible full-time employees, minus the first 30 employees. (For 2015 only, one of the transition rules in the final regulations decreased the offering percentage from 95% to 70% and increase the offset to 80 employees rather than 30.)

For purposes of this penalty, the coverage is only required to be “minimum essential coverage,” and it is not required to be “affordable” or to provide “minimum value.”    An employer who provides coverage to less than 95% (70% in 2015) of its full-time employees (and dependents) must include in the penalty count those full-time employees for whom the employer is providing MEC, so the employer will pay both the penalty and its share of the cost of benefits. The penalty will apply only if at least one full-time employee buys health insurance in a Marketplace and qualifies for a subsidy. The penalty does not apply for:

  • Full-time employees who have not yet been offered coverage because they are in their first three months of employment (consistent with the allowed “limited non-assessment period” under ESR regulations), or
  • Full-time employees who are in their measurement periods (if they are measured by the look-back measurement method),
  • Part-time employees.
  • Note: It is important not to confuse the “eligibility period” that applies to large employers under Employer Shared Responsibility with the 90-day limit on Waiting Periods that applies to all-size employer plans under other provisions of the ACA. Initially, these two separate but similar time limits might have resulted in different deadlines by which an employer must offer coverage; however, since the waiting period regulations were amended to allow employers to impose a one-month “orientation period” before the “waiting period” begins, employers should be able to “synch up” these two periods.


The 4980H(b) Penalty

The IRC 4980H(b) penalty is the original $3,000 annual penalty ($3,240 in 2016).  If an employer does offer MEC to at least 95% of its full-time employees and their dependents (70% in 2015), but the coverage is not “affordable” or does not provide “minimum value,” the employer will be subject to a monthly penalty equal to $270 for each affected full-time employee who buys health insurance in a Marketplace and qualifies for a subsidy.  The annual penalty is the sum of the 12 months of penalties. This penalty cannot exceed the amount that would apply under 4980H(a) if the employer were a non-offering employer.  (The rationale is that an employer who does offer coverage should not have to pay a higher penalty than what would apply if the employer did not offer coverage.)

Examples

Example 1:

ABC Company has 105 full-time employees and offers health coverage that is “minimum essential coverage” to only 25 of them. The coverage is affordable for all 25 of them and provides at least minimum value. Of the 80 full-time employees who are not offered coverage, 40 of them go to the Marketplace and buy health insurance and qualify for a subsidy in 2016.

The IRC 4980H(a) penalty applies because the employer does not offer coverage to at least 100 full-time employees (95% x 105 = 99.75). For 20165, the monthly 4980H(a) penalty would be:

  • $180 x (105-30) = $180 x 75 = $13,500
  • If the number of employees remains constant for each month, the annual penalty will be $162,000 (12 x $13,500)

The IRC 4980H(b) penalty.  An employer cannot be subject to both penalties, and the (b) penalty cannot be greater than the (a) penalty.   If the (b) penalty applied (because 40 of the 80 full-time employees who were not offered affordable minimum value coverage bought Marketplace coverage and qualified for a subsidy in 2016), the monthly 4980H(b) penalty would be:

  • $270 x 40 = $10,800, which would equate to $129,600 annually if the number of full-time employees receiving subsidies in the Marketplace remains constant each month.
  • However, the 4980H(b) penalty cannot be greater than the amount of the 4980H(a) penalty, which would be $13,500/month or $162,000 annually. The (b) penalty is lower.

As noted above, the employer cannot be subject to both penalties. The employer would therefore pay $162,000.00 assuming the number of employees remains constant for each month.  This is the 4980H(a) penalty.  Additionally, the employer also would pay its share of the cost for the coverage it offers for those employees who do enroll (this could be all or part of the 25 employees to whom the employer offers coverage).

Example 2:

Same as Example 1, except that of the 80 full-time employees who are not offered coverage, none of them buys insurance in the Marketplace and qualifies for a subsidy (e.g., those who go to the Marketplace qualify for Medicaid or Medi-Cal rather than for a subsidy, or they all earn more than 400% of the Federal Poverty Level, or none of them go to the Marketplace).

The employer would not be subject to a 4980H(a) or (b) penalty, because no full-time employee bought coverage in the Marketplace and qualified for a subsidy.

Example 3:

ABC Company has 105 full-time employees and offers health coverage that is “minimum essential coverage” to 100 of them. The coverage provides minimum value but is affordable for only 80 of them. Of the 20 for whom coverage is not affordable, 10 of them buy coverage in the Marketplace and qualify for a subsidy. Of the 5 full-time employees who are not offered coverage, 3 of them buy coverage in the Marketplace.  This is a total of 13 full-time employees who qualify for a subsidy in 2016.

The IRC 4980H(a) penalty does not apply because the employer offers coverage to at least 100full-time employees (95% x 105 = 99.75, rounded up to 100).  For 2016, the 4980H(a) penalty would be zero.

  • If the 4980H(a) penalty did apply, it would be calculated the same as above and would be $13,500 monthly or $162,000 annually.

The IRC 4980H(b) penalty applies because 13 full-time employees who were not offered affordable minimum value coverage bought Marketplace coverage and qualified for a subsidy in 2016. The monthly 4980H(b) penalty would be:

  • $270 x 13 = $3,510, which would equate to $42,120 annually if the number of full-time employees receiving subsidies in the Marketplace remains constant each month.
  • The 4980H(b) penalty cannot be greater than the amount of the 4980H(a) penalty if it applied. As shown above, the 4980H(a) penalty would be $13,500/month or $162,000 annually. The (b) penalty of $3,510 is less than the (a) penalty of $13,500, so the ABC Company penalty would be $3,510 per month or $42,120for the full year if all 13 employees receive subsidies all 12 months.

Additionally, the employer also would pay its share of the cost for the coverage it offers to the 100 employees (for whatever number of them actually enroll in the coverage).

Example 4:

Same as Example 3, except that of the 20 full-time employees for whom coverage is not affordable, 15 of them buy coverage in the Marketplace and qualify for a subsidy. Of the 5 full-time employees who are not offered coverage, 3 of them buy coverage in the Marketplace and qualify for a subsidy in 2016. This is a total of 18 full-time employees who buy coverage in the Marketplace and qualify for a subsidy in 2016.

The IRC 4980H(a) penalty does not apply because the employer offers coverage to at least 100 full-time employees (95% x 99.75 = 100).  For 2016, the 4980H(a) penalty would be zero.

  • If the 4980H(a) penalty did apply, it would be calculated the same as above and would be $13,500 monthly or $162,000 annually.

The IRC 4980H(b) penalty applies because 18 full-time employees who were not offered affordable minimum value coverage bought Marketplace coverage and qualified for a subsidy in 2016. The monthly 4980H(b) penalty would be:

  • $270 x 18 = $4,860, which would equate to $58,320 annually if the number of full-time employees receiving subsidies in the Marketplace remains constant each month.
  • The 4980H(b) penalty cannot be greater than the amount of the 4980H(a) penalty if it applied. As shown above, the 4980H(a) penalty would be $13,500/month or $162,000 annually. The (b) penalty of $4,860 is less than the (a) penalty of $13,500, so the (b) penalty of $4,860 applies, which would be $58,320 for the full year if all 18 employees receive subsidies for all 12 months.

Additionally, the employer also would pay its share of the cost for the coverage it offers to the 100 employees (for whatever number of them actually enroll in the coverage).

Example 5:

In 2015, ABC Company had 105 employees and did not offer health coverage to any of them. At least one full-time employee bought coverage in the Exchange and qualified for a subsidy.

The IRC 4980H(a) penalty applies because the employer does not offer coverage to at least 74 full-time employees (70% x 105 = 73.5). For 2015, the monthly 4980H(a) penalty would be:

  • $173.33 x (105-80) = $173.33 x 25 = $4,333.25.
  • If the number of employees remains constant for each month, the annual penalty will be $51,999 (12 x $4,333.25) )

The IRC 4980H(b) penalty does not apply.

Example 6:

In 2015, XYZ Company had 90 employees and did not offer health coverage to any of them. XYZ Company did not qualify for the “50-99 EEs” transition rule in 2015, so it does not get a reprieve until 2016 from the Employer Shared Responsibility rules. At least one full-time employee bought coverage in the Exchange and qualified for a subsidy.  For ALEs with between 50-99 employees, the transition rule allowing the subtraction of 80 employees (instead of 30) when calculating the penalty did not apply, so XYZ got an offset of only 30 full-time employees.

The IRC 4980H(a) penalty applies because the employer does not offer coverage to at least 70% of its full-time employees. For 2016, the monthly 4980H(a) penalty would be:

  • $173.33 x (90-30) = $173.33 x 60 = $10,399.80.
  • If the number of employees is 80 each month, the annual penalty will be $124,797.60 ($10,399.80 x 12).

The IRC 4980H(b) penalty does not apply.

Note the difference between Examples 5 and 6. XYZ Company with 90 employees pays a higher penalty than does ABC Company with 105 employees ($10,399.80/month versus $4,333.25/month), even though neither company offers coverage to any of its employees.  The reason for this disparity is because ABC Company is just 5 employees over the 100-employee threshold for the 80-employee offset, while XYZ Company is 10 employees below the threshold so has only a 30-employee offset.