It will soon be a decade since the ACA Shared Responsibility penalties were implemented. Allow us to provide a quick recap.
Subsection (a) Penalty – The Offer Requirement with the Whammy Penalty
Overview: This is the element that requires Applicable Large Employers (ALEs) to offer minimum essential coverage to employees working an average of 30+ hours per week. If two specific criteria are met, the employer must pay a penalty tax for that month.
- The employer fails to offer full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an eligible employer-sponsored plan for that month, and
- At least one full-time employee is certified to receive a subsidy for individual coverage through the exchange for that month.
Penalty Calculation: The penalty tax is calculated monthly as the product of the “applicable payment amount” and the total number of employees:
Number of individuals employed by the ALE for that month*
1/12th of $2,880 ($240 per month)
* Minus a 30-employee credit and excluding employees in a limited non-assessment period.
Margin of Error Rule: The regulations also include a so-called Margin of Error rule. This allows for employers to offer coverage to at least 95% but less than 100% of its full-time employees (and to those employees' dependents) but to escape the Subsection (a) penalty even if one or more of those employees who are not offered coverage receive a premium subsidy through the Exchange.
Margin of Error Rule Factoid: While the Margin of Error rule was originally conceived to allow for some administrative grace if coverage for certain employees was overlooked, the regulations clarify that an employer can still avoid the Subsection (a) penalty if eligibility parameters are actually designed to exclude a segment of employees, so long as it is less than 5% of the otherwise-eligible population.
Subsection (b) Penalty – The Affordability Requirement with the Per Individual Penalty
Overview: This is the element that requires ALEs to offer " affordable " coverage.” If an ALE does not offer affordable coverage (that provides minimum value), and at least one employee receives a premium subsidy for coverage purchased through an Exchange, the ALE will be liable for the penalty tax on a per individual basis.
Penalty Calculation: The penalty tax is calculated monthly based on the number of employees that actually receive a premium subsidy as follows:
Number of full-time employees who receive premium tax credits for any given month*
1/12th of $4,320 ($360 per month)
* Other than employees in a limited non-assessment period.
Margin of Error Rule: Even if an employer escapes the Subsection (a) penalty via the Margin of Error rule, the employer may still be liable for Subsection (b) penalties. If any employees are not offered coverage (and they are among those that fall within the Margin of Error window for the employer) and receive a subsidy under an Exchange, the employer will be liable for Subsection (b) for those individual employees. Just because an employer escapes the Subsection (a) penalty via the Margin of Error rule does not exclude the application of Subsection (b) penalties for those employees who fell through the cracks or were omitted from coverage by design.
Affordability Defined: Coverage is deemed affordable for an employee if the employee's required contribution (for self-only coverage) does not exceed a specified percentage of the employee's household income (9.12% in 2023). The cost of family coverage is not considered in the affordability equation. Thus, there is no impact on the determination of an affordable offer of coverage if the contribution required for any dependent coverage exceeds the threshold.
Safe Harbor Options: Immediately after the law was passed, regulators noted the impossibility of employers being able to calculate affordability based on household income. Therefore, three safe harbor options were provided for employers:
- W-2 Safe Harbor – Contributions less than 9.12% of W-2 wages
- Rate of Pay Safe Harbor – Contributions less than 9.12% of hourly or monthly pay rate.
- FPL Safe Harbor – Contributions less than 9.12% of the federal poverty line. Notably, individuals with income below 100% of the FPL are not eligible for a premium subsidy, therefore, an employee with income below 100% of the FPL cannot trigger Subsection (b) penalty.
There are pros and cons for each method, and certain pay arrangements lend themselves to specific Safe Harbor methods. In addition, there are many details and nuances that are not included in this summary. Employers may select whichever method is most appropriate for them.
When Are Penalties Levied?
Significant Delay Possible: Employers should be aware that there can be a significant delay (up to many years) before being tapped to make Shared Responsibility payments. The IRS has a data-match program that cross-references coverage/affordability offers as reported on Form 1095 and premium subsidies information provided by the Exchanges. The data match process can only occur after all reporting has been completed, which means it can’t even start until after Form 1095s and individual tax returns have been filed, and reports from the Exchanges on premium subsidies have been submitted.
Be Aware of Premature Assuredness: Employers in potential jeopardy of needing to make Shared Responsibility payments should be aware that such liabilities can take multiple years to surface. Feelings of assuredness for not having been assessed a penalty in the short term may be premature.