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It’s “What’s Up? Wednesday”. Time to talk about PENALTIES UNDER THE AFFORDABLE CARE ACT . . .

By May 1, 2013July 23rd, 2018Uncategorized

You asked:  “I’ve been hearing a lot in the news about the Affordable Care Act.  . . . How will ‘pay or play’ effect our company?”

Alex answers:

As a quick recap, last week we talked about which employers were subject to the employer mandate component of the Affordable Care Act (ACA). This week, we are talking about IRS penalties for employers who do not comply with the law. If you are a “large employer” (with at least 50 full-time or “full-time equivalent” employees), you need to know more about “pay or play”. .

You’ve come to the conclusion that your company has to “pay or play,” so now you need to know the rules to “Play.” If it is determined that you must offer health coverage to your full-time employees and their dependents (remember, dependents mean employee’s children up to age 26) it must be both affordable and provide minimum essential coverage.

Health coverage is considered affordable under this law if the employee’s contribution for the lowest-cost, self-only health coverage does not exceed 9.5% of employee’s household income.

Next, the health coverage must provide minimum essential coverage. This means that the health insurance plan must pay for at least 60% of the covered health care expenses for an average person. This type of coverage does not include dental, vision coverage or flex spending accounts.

Penalties are determined by which requirement is violated. Let’s go through a couple of scenarios:


Employer does not offer health coverage to all full-time employees.

Two conditions need to be met before the employer would see any potential penalty. First, one or more of the employer’s full-time employees enrolls in health coverage through a State Insurance Exchange AND, second, that employee receives a premium tax credit or a cost-sharing subsidy.

“State Insurance Exchanges” or “Exchanges” refer to an electronic marketplace where health insurance can easily be compared and purchased by consumers. States are expected to establish Exchanges with the federal government stepping in if a state does not set them up. Individuals who purchase insurance coverage through an Exchange could be eligible for federal subsidies to help offset certain health care costs – these are the premium tax credits or cost-sharing subsidies.

If both conditions are met, then the employer would receive a “no coverage penalty” (technically called by IRS, the “4980H[a] liability”) of $2,000/year per each one of the employer’s full-time employees excluding the first 30. Making these consequences worse is that the penalty is issued as an “excise tax” – meaning it is paid in after-tax dollars.

Question: XYZ Company has 75 FTEs but only 40 actual full-time employees. Is the company subject to the employer mandate of ACA?

Answer: Yes

Question: Does ACA require that the XYZ Company offer health coverage to all employees?

Answer: No – it is only mandatory to offer health care coverage to full-time employees (those employees working 30 or more hours per week regularly).

Question: If XYZ decides not to offer health coverage to their full-time employees and at least one of those employees enrolls in coverage through an Exchange and becomes eligible for a tax credit or subsidy, what will be the cost of the penalty?

Answer: $20,000

40 full-time employees minus 30 (remember, the first 30 are excluded) = 10

10 x $2,000 = $20,000


Employer offers health coverage to all full-time employees and their dependents, but that coverage is inadequate either because it is considered unaffordable or it does not provide at least “minimum value.”

As the outcome, the employer would be levied with an “inadequate coverage penalty” of $3,000 per full-time employee who receives an Exchange subsidy up to a maximum of $2,000 for each full-time employee (excluding the first 30). Under IRS code this is called “4980H(b) liability.”

Hopefully, you are catching on by now and realizing that in order to actually be assessed a penalty, a few things have to happen:

1.       Employer fails to offer acceptable health coverage to one or more of its full-time employees;

2.       One or more of the full-time employees enrolls in insurance through an Exchange;

3.       Those employees actually receive a premium tax credit OR a cost-sharing subsidy.

So then to fully assess if your company would have to pay a penalty for not offering health coverage or offering inadequate health coverage to your full-time employees, you would want to make a determination on whether your employees would receive Exchange tax credits or subsidies. Stay tuned next week for more on this subject and don’t forget to send us your specific questions!

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