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Employer Shared Responsibility Recap: IRS To Enforce Rules And Penalties

The Affordable Care Act (ACA) put in place the employer shared responsibility requiring applicable large employers (ALEs), or ALE members, to offer minimum essential coverage to their full-time employees or pay a tax penalty.

To fulfill this requirement, a compliant ACA plan offering must meet minimum value and affordability criteria. A complex method of employer reporting began in 2015 to help track compliance with the law. It additionally aids in identifying employees who are ineligible recipients of premium tax subsidies.

ALEs are those employers who average 50 or more full-time and full-time equivalent employees for the prior calendar year.

An ALE member is a company that is part of a controlled group of companies, as defined under the Internal Revenue Code, whose total employees across all related entities meet the ALE definition.

Curious if you are or are not an Applicable Large Employer (ALE) under the ACA and to which employees you are required to offer coverage? Register for our webinar on December 6th to determine ALE status.

Although effective in 2014, the IRS did not fully implement these tax penalties. Our understanding now is that the IRS plans to begin enforcement of these rules. Beginning this month, the IRS will reach out to employers who, they believe, did not comply with the employer shared responsibility in 2016.

We’ve spoken to a few of our members who’ve already received inquiries and notices from the IRS regarding potential penalties. Employers should prepare for potential tax assessment notices by making sure their 2016 reporting and supporting plan offering information is readily available.

Here is a quick recap of the employer shared responsibility, its associated rules, and potential penalties.

Employer Shared Responsibility

(Employer Mandate) – ALEs offer affordable, minimum value coverage to substantially all full-time employees and their dependents.

  • Affordability – an offer is affordable if the employee’s contribution— toward the employee only rate—does not exceed a certain percent of their compensation. Employers may use one of the three allowable safe harbor compensation methods to determine affordability, e.g. W-2, rate of pay, or federal poverty line (FPL).
  •  
    Example: John works for A&B Company and is a full-time employee with 2016 W-2 earnings of $3,500 per month.

    John’s employer plan is affordable if John’s contribution toward employee-only coverage does not exceed $338.10 per month ($3,500 x 9.66%).

    Plan years 2018 2017 2016 2015 2014
    Affordability Safe Harbor 9.56% 9.69% 9.66% 9.56% 9.50%
    Percentages

     

  • Minimum Value - a plan that reimburses at least 60% of the cost of essential health benefits
  • Full-time Employees – those who average 30 hours or more of service per week

Penalties

Failure to comply with the Employer Shared Responsibility provision

  • Part A/Tier 1 - §4980H(a) - Failure to offer minimum essential coverage to substantially all full-time employees, i.e. 95%, AND at least one full-time employee purchases coverage from the Exchange Marketplace and receives a subsidy.
    • The penalty for 2016 is $180 per full-time employee (less the first 30 employees) for each month they had no offer of minimum essential coverage.
      • If no coverage offered for any month in 2016, the penalty is $2,160 x the total number of full-time employees less the first 30 employees.
  • Part B/Tier 2 - §4980H(b) – Failure to offer specific full-time employees coverage that is affordable or meets minimum value AND that individual purchases coverage from the Exchange Marketplace and receives a subsidy.
    • The penalty for 2016 is $270 per full-time employee for each month they had no offer of minimum essential coverage.
      • If no coverage offered for any month in 2016 and the employee purchased Marketplace coverage and received a premium tax subsidy, the penalty is $3,240 ($270 x 12 months).
    Employer Mandate Penalties—Calendar Year 2018 2017 2016 2015 2014
    Tier One—Failure to offer coverage or to offer to 95% of employees (70% for 2015) $2,320* $2,260 $2,160 $2,080 $2,000
    Tier Two—Failure to offer coverage that is affordable and meets minimum value $3,480* $3,390 $3,240 $3,120 $3,000

    *Projected amounts

     
    Example: C&D Company averaged 89 full-time and full-time equivalent employees for the 2015 calendar year. Of the 89, 78 are full-time employees. Although an ALE, ABC did not offer minimum essential coverage to their employees for any month in 2015.
    Penalty: $168,480.00 [$180/month x 12 months x 78 full-time employees]
     
    Example: E&F Company, an ALE, offered minimum value coverage to all full-time employees for 2016. While minimum value coverage was offered to all full-time employees for all 12 months, the required contributions for 14 employees exceeded the affordability limits, i.e. greater than 9.66% of their compensation. Of the 14, 9 purchased coverage from the Exchange Marketplace and received a tax subsidy for 12 months.
    Penalty: $29,160.00 [$3,240 x 9 employees]

    Click here to download our Infobrief
    Employer Shared Responsibility: Offering An Affordable Plan

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