Penalties Under Health Care Reform

Posted by BAS - 03 December, 2015


An applicable large employer (ALE) must offer affordable minimum essential coverage that provides minimum value to its full-time employees and their dependents or pay a tax penalty (called an “assessable payment”).

Each separate employer member of the ALE group will be responsible for its own shared responsibility payment. A separate employer member is each location with its own taxpayer identification number (TIN).

1. Penalty for Failure to Offer Minimum Essential Coverage 

An ALE member will owe a payment if for any month it does not offer minimum essential coverage to at least 95% of its full-time employees and their dependents and if one or more full-time employees gets a tax credit to purchase coverage through the Exchange. 

The penalty is $2,000 for each full-time employee, excluding the first 30 full-time employees of the employer. The penalty will be determined on a month-by-month basis, which is $166.67 per month for each full-time employee. The penalty is indexed for inflation. 

Some transition relief is available for 2015. If an ALE with 100 or more full-time employees is subject to the payment, the employee count can be reduced by 80 instead of 30 to lower the penalty amount, if transition relief is requested. 

2. Penalty for Failure to offer Minimum Essential Coverage that Provides Minimum Value 

An employer might be liable for an employer shared responsibility payment for each full-time employee who receives a premium tax credit for purchasing coverage through the Exchange if the employer’s coverage is not affordable, if the coverage does not provide minimum value, or if the employee is not one of the 95% of employees who are offered minimum essential coverage. An employer may be subject to this payment only if it is not subject to the payment described above. 

The penalty is $3,000 for each full-time employee who received a premium tax credit. The penalty will be determined on a month-by-month basis, which is $250 per month for each full-time employee who received the premium tax credit. The penalty is indexed for inflation.

Applicable Large Employer

The penalties apply only to large employers. An “Applicable Large Employer” or “ALE” must offer minimum essential, affordable coverage to its full-time employees. An ALE must also comply with health care reform reporting requirements. 

An employer is an Applicable Large Employer if it had an average of at least 50 full-time employees (including full-time equivalent employees) during the prior year. A full-time employee is an employee who has on average at least 30 hours of service per week during a calendar month. 

To determine the number of full-time equivalent employees, the employer combines the number of hours of service of all non-full-time employees for the month (limited to 120 hours of service per employee) and then divides the total hours by 120. [NOTE- This large employer calculation differs from determining full-time status, described below.]

Employers with common ownership (those who are treated as a single employer under Code section 414(b), (c), (m) or (o)) are considered one employer for determining ALE status. This grouping is called a “controlled group.” The employees of all employers within the controlled group are taken into account in determining if any member of the controlled group is an ALE. If, for example, a controlled group consists of 3 locations- one with 9 employees, one with 58 employees and one with 40 employees, each of the three locations will be considered an ALE. That is because when added together, the number of employees in the controlled group as a whole is more than 50.  Each individual employer will be considered an ALE Member of the ALE Group.

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