Employer Mandate

Under Internal Revenue Code section 4980H, an Applicable Large Employer may be subject to a penalty if it does not offer its full-time employees, and their dependents, minimum essential coverage that is affordable and provides minimum value.

Determining if Penalties Apply to an Employer

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Under section 4980H of the Internal Revenue Code, an Applicable Large Employer (ALE) may be subject to a penalty if it fails to offer its full-time employees, and their dependents, minimum essential coverage (MEC) that is affordable and provides minimum value (MV).  The following outlines how to determine if penalties will apply to an employer.

1.    Did the employer have at least 50 full-time employees, including full-time equivalent employees and seasonal workers, on average during the preceding calendar year?
–    Yes:  Proceed to question #2.
–    No:  Employer is not an ALE and penalties do not apply.

2.    Does the employer offer MEC to at least 70% (for 2015 only, percentage increases to 95% beginning with 2016 plan year) of its full-time employees and their dependents?
–    Yes:  Proceed to question #3.
–    No:  Penalty may apply if at least one full-time employee receives a premium tax credit or cost-sharing subsidy to purchase coverage through a public Exchange.  The applicable penalty is $2,000 per calendar year times the total number of full-time employees in the workforce (minus 30 for an ALE with 50-99 full-time employees or minus 80 for an ALE with 100 or more full-time employees (for 2015 only, will be minus 30 for all ALEs beginning with 2016 plan year)).

3.    Does the employer-sponsored group health plan pay for at least 60 percent of the total allowed costs of benefits?
–    Yes:  Proceed to question #4.
–    No:  Penalty may apply because the plan does not provide MV.  The applicable penalty is $3,000 per calendar year for each full-time employee who receives a premium tax credit or cost-sharing subsidy to purchase coverage through a public Exchange.  Note, the penalties for failing to provide MV coverage will not exceed the amount the employer would have paid for not offering MEC under #2.

4.    Is the employee’s required contribution for the employer’s lowest cost self-only coverage that provides MV equal to or less than 9.5 percent of the employee’s household income?
–    Yes:  No penalty applies because the coverage is affordable.
–    No:  Penalty may apply because the coverage is unaffordable.  The applicable penalty is $3,000 per calendar year for each full-time employee who receives a premium tax credit or cost-sharing subsidy to purchase coverage through a public Exchange.  The combined penalties for providing unaffordable coverage or coverage that does not provide MV will not exceed the amount the employer would have paid for not offering MEC under #2.

Note:  The penalty amounts are indexed to increase each calendar year after 2014.  The penalty under #2 increased to $2,080 for 2015 and $2,160 for 2016.  The penalty under #3 and #4 increased to $3,120 for 2015 and $3,240 for 2016.  The affordability threshold is also indexed to increase annually.  The indexed percentage is 9.56 for 2015 and 9.66 for 2016.