Our series of posts on the Affordable Care Act (ACA) and its effect on employers of all sizes begins with an overview of how penalties will be determined for employers who do not offer “affordable coverage”. This is referred to as Employer Shared Responsibility in the ACA. This series will continue for the next several weeks as we explore all aspects of the ACA that impact employers and their employees.
Before an employer can determine if it may be subject to ACA penalties, it must know if it is considered a small or large employer. Generally speaking, employers with less than 50 full-time employees (or their equivalent) will be considered a small employer. Penalties related to the ACA do not apply to small employers. Easy enough!!
If the employer is considered a large employer, then two kinds of ACA penalties may apply:
1) If coverage is not offered to all eligible workers (as defined by the ACA) and at least one employee obtains coverage through the Exchange and receives a tax credit or cost sharing subsidy, the employer must pay $2,000 annually PER FULL-TIME EMPLOYEE over 30 employees (in other words, if the employer has 70 full-time employees and does not offer health coverage, the penalty would be based on 40 employees X $2,000 or $80,000 per year). You may hear this described as the “failure to offer” penalty.
2) If the employer offers coverage but it is not affordable (we’ll discuss how to determine affordability in the next post), the employer must pay $3,000 annually PER EMPLOYEE WHO RECEIVES A TAX CREDIT through the Exchange. Using the same 70-employee example as above, let’s say the employer offers coverage but it is not deemed “affordable” according to ACA guidelines. If four employees choose to obtain coverage through the Exchange instead of through the employer, the employer incurs a penalty of 4 X $3,000 or $12,000 per year.
In a nutshell, large employers who do not offer coverage are subject to a $2,000 penalty per full-time employee (after the first 30) if even one employee gets coverage through the Exchange and qualifies for the tax credit. Large employers who offer coverage but the cost is not deemed to be affordable for the employee are subject to a $3,000 penalty for only those employees who choose to obtain coverage through the Exchange.
One of the most helpful graphics on this topic we’ve seen is a flow chart prepared by the Henry J. Kaiser Family Foundation at http://healthreform.kff.org/the-basics/employer-penalty-flowchart.aspx. We recommend using this flowchart as a first step in determining whether you, as the employer, might be subject to penalties beginning in 2014.