As the year comes to a close, it’s time for business owners and HR and payroll managers to think about the required annual Affordable Care Act (ACA) reporting. Do you know if your business is facing an ACA penalty for 2022 to the Internal Revenue Service (IRS)?
Under the Employer Shared Responsibility provisions, larger employers are required to offer ACA-compliant coverage. Specifically, Applicable Large Employers (ALEs) must offer affordable, minimum-value coverage to full-time employees and their dependents. Your company is ALE if you have 50 or more full-time and full-time-equivalent employees (FTEs).
To calculate FTEs, add the hours of service for all employees working less than an average of 30 hours a week (or 130 hours a month in a given month). Then, divide the total hours by 120 to get the FTE count for that month. For part-time employees providing 121-129 hours of service, use 120 hours in this calculation.
From there, add this number to the count of your regular full-time employees for each month.
Next, you need to average all 12 months’ results. If the result is an average of 50 or full-time employees plus FTEs, your business is an ALE. Thar means you are subject to the employer mandate.
Keep in mind, you need to do your calculation on or around 1/1 each year, using all 12 months of the preceding calendar year. You cannot use any 12 consecutive months but must use January through December.
2023 Filing Deadlines
For the calendar year 2022 (reported in 2023), employers considered ALEs in 2022 must report offers of coverage to eligible employees. Form 1095-C is due by March 2, 2023.
ALEs must report their offers of coverage to the IRS by February 28, 2023, if filing by paper. When filing electronically, they must report by March 31, 2023.
If you are an ALE that did not comply with the ACA’s employer mandate, you may have to pay a per-employee, per-month fee, for ACA non-compliance if you:
- Do not offer Minimum Essential Coverage (MEC) coverage to all eligible full-time employees;
- Do not offer coverage that provides minimum value, with a cost-share of at least 60%;
- Do not offer coverage that is affordable. (At the self-only rate, your employee’s cost share for the lowest-cost ACA-compliant plan cannot exceed 9.61% of the employee’s rate of pay – or the Federal Poverty Level (FPL) in the 2022 plan year. It cannot exceed 9.12% of the employee’s rate of pay or FPL in the 2023 plan year.)
If you are an ALE and do not offer health coverage, the ACA “A” penalty (under Section 4980H(a) of the Internal Revenue Code) may be triggered if an employee obtains individual ACA-complaint coverage through a state Exchange (Covered California) and utilizes a Premium Tax Credit (PTC) to pay for it.
ALE ACA penalty A is assessed monthly and is equal to the number of FTEs (minus the first 30) multiplied by one-twelfth of $2,750 for plan year 2022 (or $2,880 for 2023).
For example, if you have 150 employees (employed for all 12 months of the calendar year) and do not offer health insurance to full-time employees and eligible dependents, if any full-time employee buys tax-subsidized insurance through the state marketplace, your penalty will be $330,000 for plan year 2022.
It’s calculated this way: 150 – 30 = 120 x $2,750 = $330,000.
ACA employer penalty “B” (under Section 4980H(b) of the Internal Revenue Code) applies when the employer offers MEC. However, it does not offer coverage with minimum value and/or that is not affordable at the employee-only rate.
Under the Federal Poverty Line (FPL) Safe Harbor, your offer of coverage for a calendar month is “affordable” if your employee’s contribution for the calendar month for the lowest-cost, self-only coverage does not exceed the designated percentage of the FPL for a single individual for the calendar year divided by 12.
Under the W-2 Safe Harbor, coverage for each month in the corresponding tax calendar year is considered affordable if the employee’s required contribution does not exceed the specified percentage of wages paid to the employee for the lowest-cost, self-only coverage. That is the amount reported in Box 1 of Form W-2 for the corresponding tax year. Special rules apply for partial years of employment.
Using the Rate of Pay Safe Harbor, an ALE’s coverage for a calendar month is affordable if the employee’s required contribution for the lowest-cost, self-only coverage does not exceed the designated annual percentage of an amount equal to 130 hours multiplied by the employee’s hourly rate of pay or the employee’s monthly salary for a non-hourly employee.
It does not matter if the employee works 150-175 hours per month. This is to account for net income at the end of the year. Pre-tax deductions can fluctuate throughout the year (due to 401k contribution changes, coverage changes for a new spouse or child, etc.).
The same safe harbor must be used for all similarly situated employees for all 12 months of the year. You cannot use Rate of Pay (ROP) Safe Harbor for some employees and Federal Poverty Level Safe Harbor for others. You also cannot use ROP for some months and W-2 Safe Harbor for others.
CaliforniaChoice offers a variety of ACA and HR calculators online. These help you if you are unsure of your group size, potential penalties, and safe harbors. You can access them at calchoice.com. All plans offered through CalChoice include the 10 Essential Health Benefits and provide minimum value.
It is important to note, however, that the information shared here is not comprehensive. Speak with a professional about your business and what makes sense for you.
Tips on Avoiding ACA Penalties
Be sure to consider the following to avoid current plan year or future ACA penalties:
- Determine your group size. If your business averages fewer than 50 full-time employees as of 1/1 annually based on the preceding calendar year, it is not an ALE. Therefore, you are not subject to the employer mandate for the new year (and related penalties).
- If you’re not sure of your group size, talk with your employee benefits broker. You can also go to the CaliforniaChoice calculators previously mentioned.
- If your business is an ALE, be sure Minimum Essential Coverage (MEC) is offered to all full-time eligible employees.
- Be sure any coverage offered to employees and dependents is fully ACA-compliant.
- Document your offers of coverage to your full-time employees.
Talk with your broker if you have questions. If you are not already working with an employee benefits broker, you can use the “Find a Broker” feature on the our website to search for one.