United States: IRS’ Final Employer Shared Responsibility Rules: What Are The Penalties And How Will They Be Assessed?

Earlier this year, the IRS issued final regulations that provide additional guidance on the employer shared responsibility rules (also called the "pay or play" rules) that will generally apply to employers' group health plans beginning in 2015 under the Patient Protection and Affordable Care Act of 2010 (i.e., the ACA or ObamaCare). Under the ACA, an applicable large employer may be required to pay an employer shared responsibility penalty if it fails to offer affordable, minimum value health coverage to substantially all of its full-time employees and their dependents. This newsletter describes the penalty amounts that will be assessed if an employer fails to comply with the rules and how the IRS will assess them. For more information about other aspects of these final rules, please refer to our related "Pay or Play Rules" newsletter.

Penalty for Failing to "Offer" Coverage – The "Section (a) Penalty"

An applicable large employer will be subject to a penalty under Internal Revenue Code Section 4980H(a) (the "Section (a) Penalty") for any month in which:

  • it fails to offer at least 95 percent (70 percent for 2015 only) of its full-time employees and their dependents the opportunity to enroll in an eligible employer-sponsored group health plan; and
  • at least one of the employer's full-time employees purchases coverage through a Marketplace (i.e., an exchange) and receives a premium tax credit or other cost-sharing reduction in order to purchase that coverage.

"Eligible employer-sponsored group health plans" include governmental, self-funded, and fully-insured group health plans that provide minimum essential coverage. Such plans do not include coverage consisting only of "excepted benefits" (such as stand-alone dental or vision coverage) or certain other types of limited coverage.

If an applicable large employer fails to meet this requirement in any month, then the employer will be subject to a Section (a) Penalty equal to $166 per month ($2,000 per year) for each full-time employee in excess of 30 employees (80 for the 2015 plan year) then employed by the employer. The Section (a) Penalty will be imposed with respect to all of the employer's full-time employees (subject to the 30/80 employee exemption) – even those who were offered compliant coverage. The Section (a) Penalty will be increased by the IRS over time for inflation.

As described in our related newsletters, whether an employer is treated as an "applicable large employer" is determined on a controlled group and affiliated service group basis. The liability for any Section (a) Penalty imposed for a particular calendar month, however, rests with the specific group member that failed to meet this particular requirement. The controlled group member's Section (a) Penalty liability is reduced by its allocable share of the group's 30/80 employee exemption. If the other employer members of the group complied with the requirement to offer coverage to substantially all of their full-time employees, then the compliant employers will not be subject to a Section (a) Penalty.

Even if an employer offers minimum essential coverage to a sufficient percentage of its full-time employees, it may still be subject to penalty under Code Section 4980H(b) if the offered coverage fails to provide "minimum value" or is not "affordable."

Penalty for Failing to Offer Minimum Value and Affordable Coverage – The "Section (b) Penalty"

An applicable large employer will be subject to a penalty under Internal Revenue Code Section 4980H(b) (the "Section (b) Penalty") for any month in which:

  • the coverage offered under the eligible employer-sponsored plan to a full-time employee is either not affordable for that employee or does not provide minimum value; and
  • that full-time employee purchases coverage through a Marketplace (i.e., an exchange) and receives a premium tax credit or other cost-sharing reduction in order to purchase that coverage.

Unlike the Section (a) Penalty, which applies with respect to all of a large employer's full-time employees (after taking into account the 30/80 reduction), the Section (b) Penalty applies only on an employee-by-employee basis. If an applicable large employer fails to offer compliant health coverage as required under this rule, then the Section (b) Penalty will be imposed at a rate of $250 per month ($3,000 per year) for the particular full-time employee with respect to which the failure occurred. The Section (b) Penalty will be increased by the IRS over time for inflation.

Coordinating the Two Penalties

The final rules include a coordination provision to ensure that an employer will not be subject to both penalties in a given month. Under this coordination rule, in no event will the Section (b) Penalty exceed the Section (a) Penalty for a month.

For example, assume an applicable large employer with 200 full-time employees offers 95 percent of such employees health plan coverage, but the coverage is not affordable for 60 of the full-time employees, all of whom purchase coverage on the Marketplace and receive a subsidy. The Section (a) Penalty will not apply. However, the employer will be subject to a Section (b) Penalty. Under the basic rule, the Section (b) Penalty would be equal to $180,000 for the year (calculated by taking the 60 full-time employees described above times the $3,000 annual penalty). If the Section (a) Penalty had applied, the employer would have been subject to a penalty of $140,000 for the year (calculated by taking 200 full-time employees, reducing that number by 30, and then multiplying the result by the $2,000 annual penalty). Therefore, in this case, the employer will be required to pay the lower penalty amount of $140,000 as a result of the coordination rule.

How the Penalties Will Be Assessed

The IRS intends to adopt procedures that ensure all employers will receive a certification that one or more employees has received a premium tax credit or other cost-sharing reduction. Basically, after the due date for individual tax returns each year and after the due date for employers to provide information to the IRS regarding its full-time employees and whether coverage was offered, the IRS will contact employers to inform them of their potential liability and provide them an opportunity to respond before any liability is assessed or notice and demand for payment is made. If it is determined that an employer is liable for an employer shared responsibility penalty tax after the employer has responded to the initial IRS contact, then the IRS will send a notice and demand for payment that will instruct the employer on how to make the payment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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