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On February 12, 2024, the IRS released Rev. Proc. 2024-14 to provide the adjusted excise tax amounts under the Affordable Care Act’s Employer Shared Responsibility provisions (also known as the ACA Pay or Play Penalty) for 2025.
For background, employers with more than 50 full-time employees (including full-time equivalent employees) are subject to the ACA Pay or Play Penalty under Section 4980H of the Internal Revenue Code (the “Code”). Employers subject to ACA Pay or Play may be liable for a penalty if they do not offer minimum essential coverage to a sufficient number of full-time employees, or if minimum essential coverage is offered to the required number of full-time employees, but that coverage is not affordable.
2025 Adjusted Penalty Amounts
There are two potential ACA employer mandate penalties that can impact ALEs:
a) IRC §4980H(a)—The “A Penalty”
The first is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.
The 2022 A Penalty is $229.17/month ($2,750 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange. Note: The IRS has not yet released the 2023 A Penalty increase.
The “A Penalty” liability is focused on whether the employer offered a major medical plan to a sufficient percentage of full-time employees—not whether that offer was affordable (or provided minimum value).
b) IRC §4980H(b)—The “B Penalty”
The second is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees).
The B Penalty applies for each full-time employee who was:
Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is not multiplied by all full-time employees.
In other words, an ALE who offers minimum essential coverage to a full-time employee will be subject to the B Penalty if:
The 2022 B Penalty is $343.33/month ($4,120 annualized) per full-time employee receiving subsidized coverage on the Exchange. Note: The IRS has not yet released the 2023 B Penalty increase.
Every year Applicable Large Employers (ALEs) must file and furnish their ACA information to the IRS and their employees, respectively. Failing to do so can result in significant IRS penalty assessments.
To recap, only groups with 50 or more full time or equivalent employees or those groups under 50 with self funded medical coverage are required to furnish their employees with copies of either the 1095-B or 1095-C forms (based on group size)
Employers will need to be sure you meet the following IRS deadlines for complying with the ACA’s Employer Mandate for 2020:
Failing to meet these deadlines can result in penalties under IRC 6721/6722, which the IRS is issuing through Letter 972CG. If you receive one of these notices, you only have 45 days from the issue date to respond to the penalty notice.
For the 2020 tax year, the penalties associated with failing to comply with IRC 6721/6722 for employers with average gross receipts of more than $5 million in the last three years are as follows:
Failure to timely file and furnish correct information returns
If employers file ACA information returns with the IRS no more than 30 days after the deadline they could be subject to a $50 penalty per return not filed, not to exceed an annual maximum of $556,500. If the ACA information returns are 31 or more days late, up to August 1, 2021, the penalty per return jumps up to $110, not to exceed an annual maximum of $1,669,500. After August 1, the penalty amount steepens to $270 per return, not to exceed an annual maximum of $3,339,000. For intentional disregard, meaning the deadline was missed willfully, the penalty more than doubles to $550 per return with no annual maximum limit.
The penalty amounts for employers with gross receipts of $5 million or less in the last three years will have the same penalty amounts per return with lower annual maximums, except in the case of intentional disregard. For more information on the penalty schedules for failing to meet the IRS deadlines click here.
As if the penalties for failing to meet the filing and furnishing deadlines weren’t enough, the IRS is also issuing penalties to employers that fail to comply with the ACA’s Employer Mandate. As a reminder to employers in conjunction with the Employer Shared Responsibility Payment (ESRP), the ACA’s Employer Mandate, Applicable Large Employers (ALEs), organizations with 50 or more full-time employees and full-time equivalent employees, are required to offer Minimum Essential Coverage (MEC) to at least 95% of their full-time workforce (and their dependents) whereby such coverage meets Minimum Value (MV) and is affordable for the employee, or be subject to Internal Revenue Code (IRC) 4980H penalties. These penalties are being issued through IRS Letter 226J.
Earlier this week, the IRS issued Notice 2019-63, which extends both: (1) the filing deadline for Forms 1095-C and 1095-B; and (2) the good-faith reporting relief. But this year, there’s more. In limited circumstances, the IRS will not penalize entities for the failure to furnish information to individuals using Form 1095-B, and in some cases, Form 1095-C (see discussion of Section 6055 Relief below).
Notice 2019-63 extends the due date for reporting entities to furnish 2019 Forms 1095-C and 1095-B to individuals from January 31, 2020 to March 2, 2020. These forms must also be filed with the IRS (along with the applicable transmittal statement) by February 28, 2020 (if filed on paper) or March 31, 2020 (if filed electronically). Reporting entities may, however, request individual extensions to file these forms with the IRS.
The IRS may impose penalties of up to $270 per form for failing to furnish an accurate Form 1095-C or 1095-B to an individual and $270 per form for failing to file an accurate Form 1095-C or 1095-B with the IRS. As in prior years, the IRS indicated in Notice 2019-63 that it would not impose these penalties for incomplete or inaccurate forms for the 2019 calendar year (due in 2020), if the reporting entity can show that it “made good-faith efforts to comply with the information-reporting requirements.” This good-faith reporting relief does not apply to forms that were untimely furnished to individuals or filed with the IRS.
Under Section 6055 of the Internal Revenue Code (the “Code”), providers of minimum essential coverage must furnish certain information to “responsible individuals” about enrollment in the minimum essential coverage during the previous calendar year. The purpose of this reporting requirement is to assist the IRS enforce compliance with the “individual mandate” penalty under the ACA.
Under the Tax Cuts and Jobs Act of 2017, the individual mandate penalty was not repealed, but the penalty amount was reduced to zero. This makes reporting under Section 6055 of the Code irrelevant. As a result, Notice 2019-63 provides limited relief from the reporting requirements under Section 6055 of the Code.
Here is a brief summary of the Section 6055 reporting requirements:
Notice 2019-63 provides relief with respect to Forms 1095-B and limited relief with respect to Forms 1095-C. For insurers and small self-funded employers, the entity must still prepare and file the Forms 1095-B with the IRS. However, these entities are not required to furnish individuals with a copy of the Form 1095-B as long as the entity satisfies both of the following requirements:
Notice 2019-63 generally does not extend this relief to large self-funded employers, except for Forms 1095-C that are prepared on behalf of individuals who are not full-time employees for the entire 2019 calendar year. A large employer sponsor of a self-funded plan may file a Form 1095-C on behalf of an individual who was enrolled in the self-funded plan during the 2019 calendar year, but was not a full-time employee during any month of the calendar year. (For these individuals, the “all 12 months” column of line 14 is completed using the code “1G.”) Examples of where this relief may extend to Forms 1095-C are: (1) former employees who terminated employment before 2019 but were enrolled in the self-funded plan under COBRA or retiree coverage; and (2) employees who were part-time during all of 2019, but were enrolled in the self-funded plan because the plan sponsor extended eligibility for the self-funded plan to part-time employees.
While the filing deadline extension and the extension of the good-faith reporting relief is likely welcome news to insurers and employers alike, it’s probably not surprising. And, while the Section 6055 reporting relief is likely surprising, it’s probably only meaningful to insurers.
On July 22, 2019, the IRS announced that the ACA affordability percentage for the 2020 calendar year will decrease to 9.78%. The current rate for the 2019 calendar year is 9.86%.
As a reminder, under the Affordable Care Act’s employer mandate, an applicable large employer is generally required to offer at least one health plan that provides affordable, minimum value coverage to its full-time employees (and minimum essential coverage to their dependents) or pay a penalty. For this purpose, “affordable” means the premium for self-only coverage cannot be greater than a specified percentage of the employee’s household income. Based on this recent guidance, that percentage will be 9.78% for the 2020 calendar year.
Employers now have the tools to evaluate the affordability of their plans for 2020. Unfortunately, for some employers, a reduction in the affordability percentage will mean that they will have to reduce what employees pay for employee only coverage, if they want their plans to be affordable in 2020.
For example, in 2019 an employer using the hourly rate of pay safe harbor to determine affordability can charge an employee earning $12 per hour up to $153.81 ($12 X 130= 1560 X 9.86%) per month for employee-only coverage. However in 2020, that same employer can only charge an employee earning $12 per hour $152.56 ($12 X 130= 1560 X 9.78%) per month for employee-only coverage, and still use that safe harbor. A reduction in the affordability percentage presents challenges especially for plans with non-calendar year renewals, as those employers that are subject to the ACA employer mandate may need to change their contribution percentage in the middle of their benefit plan year to meet the new affordability percentage. For this reason, we recommend that employers re-evaluate what changes, if any, they should make to their employee contributions to ensure their plans remain affordable under the ACA.
As we have written about previously, employers will sometimes use the Federal Poverty Level (FPL) safe harbor to determine affordability. While we won’t know the 2020 FPL until sometime in early 2020, employers are allowed to use the FPL in effect at least six months before the beginning of their plan year. This means employers can use the 2019 FPL number as a benchmark for determining affordability for 2020 now that they know what the affordability percentage is for 2020.
On Dec. 22, 2017, President Trump signed into law Congress’s tax reform legislation. The summary below addresses some of the changes that relate to compensation and employee benefits.
Individual shared responsibility – With respect to health care and employee benefits, the most important feature of the tax act is the elimination of the penalty on individual taxpayers who do not maintain minimum essential coverage. However, please note that this elimination of the penalty is prospective and only applies for months beginning after Dec. 31, 2018. Thus, the penalty remains fully in effect for 2018.
With the reduction in the penalty, some employers may see fewer employees enroll in health care coverage during their 2019 healthcare benefit open enrollment period. However, most employees will continue to view employers that offer health insurance coverage more favorably than those who do not. Therefore, offering health insurance will remain a valuable and tax-efficient recruiting and retention tool.
This may also reduce the number of individuals who enroll in healthcare through either the federal or various state specific healthcare marketplaces. However, premium tax credits will still be available for those individuals that purchase health insurance through these marketplaces. If enough healthy individuals drop their coverage, both the individual and employer group health market will likely see some cost increases to pay for the adverse selection impact of this change.
It is also important to remember that this change applies to the individual penalties only. The potential employer penalties for failing to offer coverage or offering inadequate coverage will remain, as well as the current law’s information reporting requirement.
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In IRS Notice 2018-06, the IRS announced a 30-day automatic extension for the furnishing of 2017 IRS Forms 1095-B (Health Coverage) and 1095-C (Employer-Provided Health Insurance Offer and Coverage), from January 31, 2018 to March 2, 2018. This extension was made in response to requests by employers, insurers, and other providers of health insurance coverage that additional time be provided to gather and analyze the information required to complete the Forms and is virtually identical to the extension the IRS provided for furnishing the 2016 Forms 1094-C and 1095-C. Notwithstanding the extension, the IRS encourages employers and other coverage providers to furnish the Forms as soon as possible.
Notice 2018-06 does not extend the due date for employers, insurers, and other providers of minimum essential coverage to file 2017 Forms 1094-B, 1095-B, 1094-C and 1095-C with the IRS. The filing due date for these forms as it stands today remains February 28, 2018 (April 2, 2018, if filing electronically).
The IRS also indicates that, while failure to furnish and file the Forms on a timely basis may subject employers and other coverage providers to penalties, such entities should still attempt to furnish and file even after the applicable due date as the IRS will take such action into consideration when determining whether to abate penalties.
Additionally, the Notice provides that good faith reporting standards will apply once again for 2017 reporting. This means that reporting entities will not be subject to reporting penalties for incorrect or incomplete information if they can show that they have made good faith efforts to comply with the 2017 Form 1094 and 1095 information-reporting requirements. This relief applies to missing and incorrect taxpayer identification numbers and dates of birth, and other required return information. However, no relief is provided where there has not been a good faith effort to comply with the reporting requirements or where there has been a failure to file an information return or furnish a statement by the applicable due date (as extended).
Finally, an individual taxpayer who files his or her tax return before receiving a 2017 Form 1095-B or 1095-C, as applicable, may rely on other information received from his or her employer or coverage provider for purposes of filing his or her return.
Until very recently, employers were at risk of receiving steep fines if they reimbursed employees for non-employer sponsored medical care – the Affordable Care Act (ACA) included fines of up to $36,500 a year per employee for such an action. Late in 2016, however, President Obama signed the 21st Century Cures Act and established Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). As of January 1, 2017, small employers can offer these tax-free medical care reimbursements to eligible employees.
If an employee incurs a medical care expense, such as health insurance premiums or eligible medical expenses under IRC Section 213(d), the employer can reimburse the employee up to $4,950 for single coverage or $10,000 for family coverage. Employees may not make any contributions or salary deferrals to QSEHRAs.
The maximum amount must
be prorated for those not eligible for an entire year. For example, an employer
offering the maximum reimbursement amount should only reimburse up to $2,475 to
an employee who has been working for the company for six months. For a complete
list of medical expenses covered under IRC 213(d), see https://www.irs.gov/pub/irs-pdf/p502.pdf.
Employers may tailor which expenses they will reimburse to a certain extent,
and do not have to reimburse employees for all eligible medical expenses.
Much like other healthcare reimbursement arrangements, employees may have to provide substantiation before reimbursement. The IRS has discretion to establish requirements regarding this process, but has not yet done so. Although reimbursements may be provided tax-free, they must be reported on the employee’s W-2 in Box 12 using the code “FF.”
To offer QSEHRAs, an employer cannot be an applicable large employer (ALE) under the ACA. Only employers with fewer than 50 full-time equivalent employees can offer this benefit. Further, a group cannot offer group health plans to any employees to qualify.
Typically, an employer that chooses to offer a QSEHRA must offer it to all employees who have completed at least 90 days of work. The few exceptions to this rule include part-time or seasonal employees, non-resident aliens, employees under the age of 25, and employees covered by a collective bargaining agreement.
Employers may offer differing reimbursement amounts based on employee age or family size. However, such variances must be based on the cost of premiums of a reference policy on the individual market. It is currently unclear which reference policy will be selected or how permitted discrepancies will be calculated.
To be eligible for a tax-free reimbursement, employees must have proof of minimum essential coverage. It is uncertain how closely employers will have to scrutinize such proof, although guidance will hopefully be available soon.
Eligible employees must disclose to health exchanges the amount of QSEHRA benefits available to them. The exchanges will account for the reported amount, even if the employee does not utilize it, and will likely reduce the amount of the subsidies available. Employers should take this into account before adopting a QSEHRA.
In order to establish a QSEHRA, employers will have to set up and administer a plan. Group health plan requirements, such as ACA reporting and COBRA requirements, do not apply to QSEHRAs. But in order to properly provide reimbursements to employees, employers will likely have to establish reimbursement procedures.
Additionally, any eligible employees must be notified of the arrangements in writing at least 90 days before the first day they will be eligible to participate. For the current year, the IRS is giving employers who implement QSEHRAs an extension until March 13, 2017 to provide a notice. The notice must provide the amount of the maximum benefit, and that eligible employees inform health insurance exchanges this benefit is available to them. It also must inform eligible employees they may be subject to the individual ACA penalties if they do not have minimum essential coverage.
The next ACA compliance hurdle employers are set to face is managing subsidy notifications and appeals. Many exchanges recently began mailing out notifications this summer and it’s important for employers to make sure they’re prepared to manage the process. Why? Well, subsidies—also referred to as Advanced Premium Tax Credits, are a trigger for employer penalties. If you fail to offer coverage to an eligible employee and the employee receives a subsidy, you may be liable for a fine.
If an employee receives a subsidy, you’ll receive a notice. This is where things can get complicated. You need to ensure that the notifications go directly to the correct person or department as soon as possible, because you (the employer) only have 90 days from the date on the notification to respond. And rounding up these notices may not be so easy. For example, your employee may not have put the right employer address on their exchange / marketplace application. Most often, employees will list the address of the location where they work, not necessarily the address where the notification should go, like your headquarters or HR department. If the employee is receiving a subsidy but put a wrong address or did not put any address for their employer, you will not even receive a notice about that employee.
Once you receive the notification, you must decide whether or not you want to appeal the subsidy. If you offered minimum essential coverage (MEC) to the employee who received a subsidy and it met both the affordability and minimum value requirements, you should consider appealing.
You may think that appealing a subsidy and potentially getting in the way of your employee receiving a tax credit could create complications. Believe it or not, you may actually be doing your employee a favor. If an employee receives a subsidy when they weren’t supposed to, they’ll likely have to repay some (or all) of the subsidy amount back when they file their taxes. Your appeal can help minimize the chance of this happening since they will learn sooner rather than later that they didn’t qualify for the subsidy. Plus, the appeal can help prevent unnecessary fines impacting your organization by showing that qualifying coverage was in fact offered.
If you have grounds to appeal, you can complete an Employer Appeal Request Form and submit it to the appropriate exchange / marketplace (Note: this particular form is intended to appeal subsidies through the Federal exchange). The form will ask for information about your organization, the employee whose subsidy you’re appealing, and why you’re appealing it. Once sent, the exchange will notify both you and the employee when the appeal was received.
Next, the exchange will review the case and make a decision. In some cases, the exchange may choose to hold a hearing. Once a decision is made, you and your employee will be notified. But it doesn’t necessarily end there. Your employee will have an opportunity to appeal the exchange’s decision with the Department of Health and Human Services (HHS). If HHS decides to hold a hearing, you may be called to testify. In this situation, HHS will review the case and make a final decision. If HHS decides that the employee isn’t eligible for the subsidy, then the employee may have to repay the subsidy amount for the last few months. On the other hand, if the HHS decides the employee is eligible for the subsidy, it will be important for you to keep your appeal on file since this can potentially result in a fine from the IRS later in the year.
Sound complicated? It certainly can be. Managing subsidies and appeals could quickly add up to a substantial time investment, and if handled improperly you could see additional impacts to your bottom line in the form of fines. Handling subsidy notifications and appeals properly up front can lead to fewer fines down the road, benefiting both you and your employees.
Beginning in Spring 2016, the Affordable Care Act (ACA) Exchanges/Marketplaces will begin to send notices to employers whose employees have received government-subsidized health insurance through the Exchanges. The ACA created the “Employer Notice Program” to give employers the opportunity to contest a potential penalty for employees receiving subsidized health insurance via an Exchange.
The notices will identify any employees who received an advance premium tax credit (APTC). If a full-time employee of an applicable large employer (ALE) receives a premium tax credit for coverage through the Exchanges in 2016, the ALE will be liable for the employer shared responsibility payment. The penalty if an employer doesn’t offer full-time equivalent employees (FTEs) affordable minimum value essential coverage is $2,160 per FTE (minus the first 30) in 2016. If an employer offers coverage, but it is not considered affordable, the penalty is the lesser of $3,240 per subsidized FTE in 2016 or the above penalty. Penalties for future years will be indexed for inflation and posted on the IRS website. The Employer Notice Program does provide an opportunity for an ALE to file an appeal if employees claimed subsidies they were not entitled to.
The first batch of notices will be sent in Spring 2016 and additional notices will be sent throughout the year. For 2016, the notices are expected to be sent to employers if the employee received an APTC for at least one month in 2016 and the employee provided the Exchange with the complete employer address.
Last September, the Centers for Medicare and Medicaid Services (CMS) issued FAQs regarding the Employer Notice Program. The FAQs respond to several questions regarding how employers should respond if they receive a notice that an employee received premium tax credits and cost sharing reductions through the ACA’s Exchanges.
Employers will have an opportunity to appeal the employer notice by proving they offered the employee access to affordable minimum value employer-sponsored coverage, therefore making the employee ineligible for APTC. An employer has 90 days from the date of the notice to appeal. If the employer’s appeal is successful, the Exchange will send a notice to the employee suggesting the employee update their Exchange application to reflect that he or she has access or is enrolled in other coverage. The notice to the employee will further explain that failure to provide an update to their application may result in a tax liability.
An employer appeal request form is available on the Healthcare.gov website. For more details about the Employer Notice Program or the employer appeal request form visit www.healthcare.gov.
Although CMS has provided these guidelines to apply only to the Federal Exchange, it is likely that the state-based Exchanges will have similar notification programs.
Employers should prepare in advance by developing a process for handling the Exchange notices, including appealing any incorrect information that an employee may have provided to the Exchange. Advance preparation will enable you to respond to the notice promptly and help to avoid potential employer penalties.