Health Insurance Requirements and Penalties Under the Affordable Care Act

For an applicable “Large Employer” to avoid penalty under the Affordable Care Act, it must offer health insurance coverage to its full-time employees. That insurance plan offered must meet three requirements:

  1. The insurance plan must provide minimum essential coverage for the eligible employees and their dependents;
  2. The insurance plan must meet at least the minimum value to each employee eligible; and
  3. The insurance plan must be affordable to the employee.

In Part 2 of this article, we summarize the rules, plus also consider the applicable penalties when a Large Employer does not meet the three set of standards under the Affordable Care Act.

Penalty: Failure to Offer Minimum Essential Coverage

“Minimum Essential Coverage” is the new general term describing the core services covered under most group health plans. Nearly every plan of coverage now includes those core services. Additionally, however, the employer must offer the coverage to a minimum number of eligible employees. Those employees include all who work at least 30 hours weekly (averaged), and their children, up to age 26. Spouses are not counted, nor are required to be offered coverage. Part-time workers are similarly not required for offering coverage. The minimum amount of eligible employees to be offered insurance is 70% in year 2015, and 95% for year 2016 and thereafter.

The business could be assessed a non-tax-deductible $2,000 penalty per full-time employee, per each year the company fails to offer Minimum Essential Coverage. There is a penalty “exemption” for up to 80 employees during 2015, and for up to 30 employees thereafter. There is no penalty for a business failing (or refusing) to offer insurance coverage for part-time employees – again, those working under 30 hours per week. Also, the penalty may be prorated to $166.67 per month for partial years. But obviously, this adds up quickly.

The penalty, however, is not automatically imposed when a business fails to provide this Minimum Essential Coverage. The penalty will only be assessed if at least one full-time employee, using “premium tax credits”, buys health insurance from the “Marketplace”. But given each employee’s individual incentive to have health insurance coverage, employees are likely to purchase a plan if the employer fails to provide. Therefore, for required businesses, that penalty is more-than-likely to be assessed. The penalty is practically guaranteed.

Penalty: Failure to Offer Coverage of Minimum Value

Health insurance plans vary. There are a great many available options for coverage, for businesses to offer their employees. Cost wise, the most attractive coverage plans are those with “high-deductible, minimum coverage”. This insurance has a relatively lower premium cost, but also provides very little financial value to the employee.

The ACA rules set the standard for what is considered “Minimum Value”. The offered plan must cover at least 60% of its eligible employees’ health care costs. Other employee contributions (like copayments and deductibles) can cover the other 40% of costs. Similar to the Minimum Coverage component, most carriers can determine if the plan meets the Minimum Value requirement.

Any Large Employer that fails to meet the Minimum Value requirement could be subject to penalty. The penalty kicks in whenever a full-time employee uses the new “premium tax credits” to buy health coverage on the new “Marketplace”. For each such employee, the employer gets a penalty of $250, per month the employee was not offered a minimum value plan by the employer. As a rule, this penalty is not a tax-deductible expense.

Penalty: Failure to Offer Affordable Coverage

Employers may be required to help cover some of the cost of health coverage for its full-time employees. The business is only required to help fund the cost for its employee’s “Self-Only” coverage, and not for coverage for children and spouses.

Under ACA, there are two safe zones, called “safe-harbors”. By their function, these safe harbors define what is considered “Affordable”. Here, the employees’ costs for “Self-Only” coverage are limited to 9.5% of either:

  1. The employee’s Form W-2 wages;
  2. His / her rate of pay; or
  3. The federal poverty level (which in 2015, for a household of 1 person, was under $15,000).

The penalty is calculated exactly the same as that for the Failure to Offer Minimum Value, and is imposed the same way as well.

Dealing with the Penalties

Nearly all ACA related penalties will be determined, calculated and assessed electronically by IRS, based upon all filed Forms 1094-C and employee-issued Forms 1095-C. Most notices for assessment of any penalty will be generated by an automated correspondence system. IRS expects to minimize its human interaction with employers, and simply collect penalty payments via the same non-interactive correspondence.

However, businesses should be aware that these assessed penalties can be miscalculated by IRS. As well, the employer’s status as a Large Employer could be incorrectly determined. IRS correspondence assessments tend to be based upon limited information, and are quite often – wrong. In such cases, the employer should seek a qualified IRS tax attorney to challenge the penalties, whether they be overstated, or even non-applicable to the business whatsoever. Whether in correspondence, face-to-face audit, or even after the examination closes, penalties can be challenged when you have the help of an experienced IRS tax attorney like Jeffrey Anton Collins of Tax Law Offices in Naperville, IL.

We should all predict that within 2 years, the U.S Tax Court will have a schedule full of challenges to incorrectly determined Affordable Care Act penalties. If you have any questions about the tax issues your business faces as a result of the ACA, contact Mr. Collins today.