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Health Care Reform: Employer Tax Penalties

Jerry Healy 2/26/2013
Jerry Healy

Under the Affordable Care Act, as codified in section 4980H of the Internal Revenue code, you as a large employer may be required to offer group health coverage that is affordable and worth a minimum value beginning  in 2014 or otherwise risk paying a tax penalty. Moreover, if you don’t offer any qualifying coverage, you may incur a tax penalty as well.

Here’s a basic overview of these issues but there are many special rules and exceptions that are found in the regulations which are not addressed here.

1. Do you have at least 50 full-time (or full-time equivalent employees)?

Stated this simply, it sounds like an easy question to answer but the answer is not as simple as one might think. The question refers to the average number of employees on each business day of the preceding year. Moreover, what’s the definition of a full-time employee? What’s the definition of a full-time equivalent? How do you classify seasonal employees? And the list of questions goes on and on. However in general terms, if you have less than 50 employees, then you are not subject to a tax  if you do not provide health coverage at all or coverage that is not affordable or of a minimum value. For those other questions, professional guidance will help you get the right answers.

2. Do you offer coverage to 95% of full-time employees (and children)?

A straight forward yes or no answer does not necessarily yield a clear result. In general, if it is clear that you do not offer coverage to 95% of your full-time employees, then it is likely that a tax will apply. If at least one employee receives a cost sharing subsidy in an Exchange or a premium tax credit, you will risk incurring a penalty that will be $2,000 times the entire number of full-time employees in the workforce (minus 30).

3. Does medical insurance offered cover at least 60% of health care expenses for full-time employees?

If you answer no to this question, then a tax may apply since the coverage would not meet the requirement of being of a minimum value. With respect to employees who choose to purchase coverage in an Exchange and who receive a premium tax credit, the employer risks a tax of $3,000 for each employee who opts out of employer coverage, purchases coverage in the Exchange and receives a Federal subsidy to assist with that purchase.

4. Do employees have to pay more than 9.5% of their family income for the employee-offered coverage (single-only coverage)?

So this question has been in the news a lot in recent weeks. In the case of a single employee with no children the question has an easy answer; if they have to pay more than 9.5% of their adjusted gross income for employee-only coverage, a penalty will likely apply, since this does not meet the definition of affordability. The penalty is the same as in the response to #3 above.

As I said early on though, these are really not simple yes and no questions. For example, full-time status must be determined on a monthly basis, and predicting whether health coverage is affordable would require you to know an employee’s household income. While there are a number of safe harbors you can use as alternatives, it is important to work with professional consultants who understand all the issues, so that you can make the best decision for your organization. Click here for details related to some of the safe harbors.

And click here for an overview of important definitions to help you understand whether you may be subject to taxes under these requirements.

Although it may appear that payment of the tax is a better alternative to offering health benefits, there are many long-term strategic issues that must be evaluated before this type of decision is made.

Keenan is here to help. We offer Health Care Reform expertise and state-of-the-art analytical tools to assist with your decision making and planning. Complete our online form or contact your local Keenan Account Executive for additional information.