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ACA Penalties – What is the Cost?

Contributor: Judy Liang, aPHR

February 3rd, 2023 | 5 min. read

By Tony Calavitta

The complexity of the Affordable Care Act (ACA) can make adhering to all associated requirements seem an impossible job.

With numerous penalties in place for ACA compliance violations, the stakes of doing this job correctly couldn’t be higher.

If you are here, you may be feeling the pressure of facing these violations and penalties.

Here at Combined, our ACA and benefits specialists have helped countless employers follow ACA requirements and avoid the hefty cost of ACA noncompliance.

We want you to fully know all ACA requirements and better understand the cost of failing to meet them so that ACA penalties don’t become an expense to your business.

By reading this article, you will learn everything you need to know to easily meet ACA compliance demands and successfully avoid any penalties.

What are ACA employer requirements?

The ACA stipulates that all Applicable Large Employers (ALE) must provide:

  • Minimum Essential Coverage (MEC) to at least 95% of full-time employees
  • The MEC offered must meet affordability and minimum value standards

Only employers that qualify as ALEs are responsible for meeting these ACA coverage requirements.

So, the first question to ask is – What is an ALE?

What is an ALE under the ACA?

The ACA defines an ALE as an employer that has an average of 50 full-time employees including full-time equivalent employees during the previous calendar year.

By looking at the total hours worked by both your full-time and part-time/ variable employees, you can calculate your full-time equivalents (FTEs).

If this number is at or greater than 50, you qualify as an ALE – this means the ACA requires you to offer adequate health coverage to at least 95% of your full-time employees.

So, the next question to ask is – What is adequate coverage?

What is adequate health coverage under the ACA?

The ACA defines adequate coverage as an employer-sponsored MEC plan that is both affordable and minimum value.

What qualifies as affordable health care coverage?

To meet the ACA standard for affordability, an employee is only allowed to pay a certain amount toward their lowest-cost coverage premium. It is important to note that this maximum contribution amount fluctuates as ACA regulations change.

For 2023, the maximum employee contribution is 9.12% of their annual household income.

This means that for coverage to be considered affordable, the lowest cost plan you offer employees cannot require an employee contribution greater than this percentage.

What qualifies as minimum value health care coverage?

To meet the ACA standard for minimum value, the health care plan you offer must also cover at least 60% of the average total covered benefits cost.

This means that if an employee receives medical attention, for coverage to be considered minimum value, their health care plan must pay 60% of the total bill.

4 costly ACA compliance penalties

You are probably asking one last and very important question – Why does it matter?

Understanding and following ACA requirements matters because the high cost of failing to do so is high can be crippling. Every requirement discussed is enforced with IRS penalties that no employer wants to pay.

As we look at 4 major ACA noncompliance penalties, you will see just how expensive ACA noncompliance can be.

Noncompliance Penalty #1 - Section 4980H (a)

The first requirement under the ACA is that all ALEs must offer MEC to at least 95% of full-time employees.

Unsurprisingly, the first penalty, under section 4980H(a), is for failing to offer coverage.

All ALEs are required to report whether they offered coverage.

The IRS will assess employer liability for a penalty in 2 ways:

  1. If an ALE reports that they did not offer coverage, the IRS will assess a 4980H(a) penalty and request an employer shared responsibility payment (ESRP).

  2. If an ALE reports that they did offer coverage but at least one eligible employee was approved to enroll in a subsidized individual health care plan using a premium tax credit, the IRS will assess a 4980H(a) penalty and request an ESRP.

Once the 4980H(a) penalty has been assessed, the ESRP is calculated like this:

The ESRP amount owed for each month coverage was not offered for 2023 would be:

($2,880) X (Total # of full-time employees – 30) / (12 months)

The IRS total ESRP request will be this amount multiplied by the number of months coverage was not offered.

For Example – If you employ 100 full-time employees and did not offer coverage to them during 6 months of the year, you would be subject to an ESRP of $100,800.

($2,880) X (100 full-time employees – 30) / (12 months) = $16,800 per month

($16,800 per month) X (6 months where coverage was not offered) = $100,800 ESRP

Noncompliance Penalty #2 – Section 4980H (b)

The second requirement under the ACA is that ALEs must offer MEC that is both affordable and minimum value.

The second penalty, under section 4980H(b), is for offering inadequate coverage.

ALEs that report offering coverage to the IRS are also required to report detailed information on the coverage offered to each employee on Form 1095-C.

If the coverage reported on Form 1095-C does not meet ACA standards for affordability and minimum value, the IRS will assess a 4980H(b) penalty for each employee with inadequate coverage and request an ESRP.

Once the 4980H(a) penalty has been assessed, the ESRP is calculated like this:

The ESRP amount owed for each month coverage was inadequate for 2023 would be:

($4,320) X (# of employees with inadequate coverage) / (12 months)

The IRS total ESRP request will be this amount multiplied by the number of months coverage was inadequate.

For Example – If you employ 100 full-time employees and offer them all coverage, but that coverage for 20 of your employees is either not affordable or not minimum value for 6 months of the year, you would be subject to an ESRP of $43,200

($4,320) X (20 employees with inadequate coverage) / (12 months) = $7,200 per month

(7,200 per month) X (6 months where coverage was inadequate) = $43,200 ESRP

Note: For the same employer, the ESRP for a 4980H (b) penalty cannot exceed the estimated ESRP for a 4980H (a) penalty.

In other words, the penalty for failing to offer coverage is the maximum fine an employer in violation of either ACA requirements can receive.

Noncompliance Penalty #3 – Failure to file

The ACA requires that all ALEs report health care information for all eligible employees to the IRS by March 31st each year.

 

The third penalty, under Section 6721, is for failing to file – this penalty governs incorrect filing, late filing, and intentional disregard for filing.

 

The failure to file penalties for 2023 are:

  • Complete and accurate filing submitted on time will receive no penalty

  • Complete and accurate filing submitted no more than 30 days late will receive a $50 penalty per return with a $588,500 annual maximum

  • Complete and accurate filing submitted after 30 days but before August 1st will receive a $110 penalty per return with a $1,766,000 annual maximum

  • Complete and accurate filing submitted after August 1st will receive a $290 penalty per return with a $3,532,500 annual maximum

  • If the IRS finds intentional disregard for filing, a $580 penalty per expected return with no annual maximum will be assessed

Noncompliance Penalty #4 – Failure to Furnish

The ACA requires that all ALEs that report coverage offers to the IRS must also provide a copy of Form 1095-C to all eligible employees.

This statement details coverage information:

  • the coverage offered
  • the lowest cost premium offered
  • the number of months during which the coverage was offered

The fourth penalty, under Section 6722, is for failing to furnish.

If an ALE fails to furnish their eligible employees by an IRS-specified deadline, they will receive a $290 penalty per statement with a $3,532,500 annual maximum.

 

If the IRS finds intentional disregard for furnishing, the ALE will receive a $580 penalty per statement with no annual maximum.

Next steps to worry-free and penalty-free ACA compliance

With penalties for noncompliance around every turn, navigating the complexity of ACA requirements is difficult.

It’s easy to get lost trying to keep up with ongoing changes and avoid growing penalties.

But, with the right map, navigating this troublesome task can be made simple.

Here at Combined, that is exactly what our skilled ACA and benefits specialists want to provide you with. Our team has helped direct countless employers, just like you, to ACA compliance.

We are confident that our personal and technological solutions can help guide you to this also.

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Schedule an appointment with an expert today to get on the path toward worry-free and penalty-free ACA compliance.

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If you are not yet ready to speak with a team member, you may find these resources helpful:

This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.