Under Internal Revenue Code (Code) Section 4980H, large employers that do not offer health coverage to substantially all full-time employees and their dependent children, or offer coverage that is “inadequate” or “unaffordable,” and have at least one employee enroll in Exchange (Marketplace) coverage and qualify for a federal premium tax credit or cost-sharing reduction, must pay a non-deductible penalty. While generally effective January 1, 2015, the final regulations provide transition relief for non-calendar year plans in existence on December 27, 2012: for any employee for whom the employer offers “adequate” and “affordable” coverage by the first day of the plan year beginning in 2015, no penalty will be due prior to the beginning of the plan year beginning in 2015. Note that an employer is not eligible for this transition if it modified its plan year after December 27, 2012 to begin at a later date.
Large Employers Subject to the Penalty
The Employer Mandate (or Free Rider Penalty) only applies to large employers. A large employer generally is one that employed an average of at least 50 full-time equivalent employees on business days during the preceding year. However, employers with 50-99 full-time equivalent employees are not subject to the penalty until the first day of the plan year that began on or after January 1, 2016. An employer’s number of full-time employees is based on actual hours of service in the prior year. However, for purposes of determining whether an employer is a large employer in 2015, employers were permitted to use a period of at least six consecutive calendar months, chosen by the employer, in the 2014 calendar year (rather than having to use the entire 2014 calendar year).
There are two penalties that could apply:
If the employer does not offer coverage to substantially all full-time employees and their dependent children, and at least one employee enrolls in exchange coverage and qualifies for a premium tax credit, the monthly penalty imposed under Code Section 4980H(a) is 1/12th times $2,000 (as indexed yearly) per employee after the first 30 employees. A transition rule for 2015 increased this number to 80 employees. For the 2015 plan year, an employer has satisfied the requirement to offer coverage to “substantially all” employees if it offered coverage to 70% of the employees (decreased from 95% from the proposed regulations) who are considered full-time under the law. Beginning in 2016, the substantially all threshold increased to 95%.
A second penalty applies if the employer’s provided coverage is considered “inadequate” or “unaffordable.” This penalty could also be triggered for any full-time employee who is not offered coverage in the situation where the employer satisfies the “substantially all” requirements (70% in 2015 and 95% in 2016 and after) but the employee is not offered coverage and thus falls in the gap (30% for 2015 and 5% for 2016 and after). The amount of this penalty is 1/12th x $3,000 (as indexed yearly) per month per full-time employee who enrolls in exchange coverage and qualifies for a federal premium tax credit. The amount of the penalty is capped at the amount the employer would have had to pay for not offering coverage at all under 4980H(a).