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Under the Affordable Care Act (ACA), large employers are required to offer health insurance to their employees. Despite everything going on, the IRS will continue issuing letters to large employers regarding penalties for years prior. Beginning in 2015, employers that do not meet the ACA standards can be assessed by a shared responsibility payment. Here are a few of the details behind the ACA health plan penalties and what that may mean for your business:
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What are the standards for coverage under the ACA?
For employers to avoid penalties, they must meet three requirements:
Employers must offer healthcare coverage to at least 95% of full-time employees as well as their dependents until they reach the age of 26. Part-time employees who work fewer than 30 hours a week are not required to have coverage by their employer.
Employers who do not meet the minimum essential coverage requirements could receive a penalty equal to the number of full-time employees, minus 30, multiplied by $2,000. This penalty can incur if one full-time employee purchases coverage with premium tax credits within the Health Insurance Marketplace. For 2020, the penalty is $2,570 for the year.
The ACA also required employers to offer health coverage of a predetermined minimum value. The plan should cover certain medical expenses and pay at least 60% of the employee’s health care costs to meet this minimum value requirement. Employees would pay the additional 40% with deductibles and copays.
Employers can determine insurance value by looking at the Summary of Benefits and Coverage document or by asking the health insurance providers. Employers can also calculate the minimum value on their own by using a government calculator or engaging an actuary to determine the value. It is important to have written documentation that shows that your coverage supports the minimum value requirement.
Lastly, the healthcare plan must meet the ACA’s affordability standard. This limits the amount employers can charge employees for self-only coverage. To be considered ‘affordable’ employee’s cost for self-only coverage can’t go above 9.5% of the employee’s wages in box 1 of their W-2 Form, the employee’s rate of pay, or the federal poverty level.
If an employer does not meet the affordability requirement, they could open themselves up to a $3,000 annual penalty for the full-time employees that purchase health coverage on the Marketplace. The penalty adjusts for inflation rates, and for 2020 the rate is $3,860.
What is considered a large employer?
Employers with at least 50 full-time employees (including full-time equivalents) from the previous year are considered large employers. Aggregated groups can make this consideration sometimes difficult. Companies with fewer than 50 full-time employees, but are involved in an aggregated group with other companies, will be considered large employers.
These aggregated groups include:
- Parent-subsidiary group if one company owns 80% of one or more companies
- Brother-sister groups with five or fewer employees, estates, or trusts own 80% of two or more entities and have 50% identical ownership of those entities
- Tax-exempt organizations if 80% of directors or trustees of one organization are representatives of or controlled by another organization
- Firms that provide services, like healthcare, law, engineering, accounting, etc. if the firms have common owners, provide services for each other, or work together to provide services to customers
- Any firm whose main revenue comes from the management of other companies
As you begin calculating the number of individuals you employed last year, determine the number of employees who have worked at least 30 hours a week on average. Those who haven’t reached that number are added together and divided by 120 to determine full-time equivalents.
What to do if you receive a penalty?
The employers that do not offer health coverage and meet the ACA requirements will owe penalties for full-time employees that report premium tax credits on their income tax returns for health insurance when purchased through the Marketplace. If this happens, the IRS will mail them a tax liability notice and allow them to respond prior to any required payment.
Forms 1095- C and 1094- C and employee’s 1040 Forms are where the IRS will determine any shared responsibility payment. Once an employer receives notice from the IRS, employers have 30 days to respond by giving the IRS an explanation of why the assessment is incorrect in their view or pay the penalty.
At SBMA, we ensure all of the coverage that is offered is ACA compliant. We help file your 1094 and 1095 Forms. Contact us for more information!