In 2010, the Patient Protection Act or Affordable Care Act was signed into law to help stop the skyrocketing costs of healthcare for Americans. The plan was set up to require all Americans to carry health insurance either by enrolling in a Marketplace insurance plan or through employer-sponsored plans. Part of the law required companies with 50 or more full time employees or full time equivalent employees (Applicable Large Employers – ALEs) to offer health insurance that is affordable and has minimal essential coverage. If an employee applies for a subsidy with the federal government and he/she is employed by an ALE who did not offer him/her coverage, the company could be penalized.
There are two types of penalties under the Affordable Care Act;
1) The 4980H(a) Penalty – PENALTY FOR NOT OFFERING COVERAGE TO FULL TIME EMPLOYEES
This penalty is triggered when an ALE does not offer health insurance coverage to at least 95% of its Full-Time employees. If an employee applies and receives a tax credit or subsidy for insurance purchased from the Marketplace, the IRS will access a penalty to the company. This penalty is calculated by the ALEs total number of full time employees (less 30) x 1/12 of $2260 for any applicable month.
2) The 4980H(b) Penalty – ALEs OFFER OF COVERAGE IS NOT AFFORDABLE AND DOES NOT PROVIDE MINIMUM VALUE
The 4980H(b) Penalty can be accessed to an ALE who may offer coverage but the coverage is not considered affordable. According to the IRS, insurance is considered to be affordable if the employee’s contribution for self-only coverage, in the least expensive plan option of the employer sponsored plan (which meets the ACA guidelines for minimum essential coverage) does not exceed 9.56% of the employee’s household income for the year. Employers have the option to use one of three safe harbor codes to determine if their plan is affordable since it can be difficult to measure an employee’s household income.
Federal Poverty Level – To be eligible to use the FPL safe harbor, the monthly employee contribution for self-only coverage should not exceed 9.56% of the Federal Poverty Level divided by 12.
W2 Wages – The W2 safe harbor code can be used if the employer will use the employee’s wages from Box 1 on their W2 form to determined affordability. If employee’s health coverage is premium is not more than 9.69% of their wages, the coverage is considered affordable.
Hourly Rate of Pay – Rate of pay safe harbor is based on the employee’s hourly wage x 130 hours. If employee’s premium is not more than 9.69% for plan years beginning in 2017, the coverage is considered affordable
Since the penalties can be very costly, it is advisable to make sure your organization is compliant with the fluctuating ACA regulations. Make sure you speak with a benefits attorney or use a responsible ACA Reporting Service if looking to outsource your ACA reporting.