CRS Reviews Healthcare Reform Tax Penalties

PPACA does not explicitly mandate an employer offer employees acceptable health insurance. However, certain employers with at least 50 full-time equivalent employees will face penalties, beginning in 2014, if one or more of their full-time employees obtains a premium credit through an exchange.¹ As described in greater detail below, an individual may be eligible for a premium credit either because the employer does not offer coverage or the employer offers coverage that is either not "affordable" or does not provide "minimum value."

Application Only to "Large Employers"

Only a large employer may be subject to penalties regarding employer-sponsored health insurance. A "large employer" is an employer who employed an average of at least 50 full-time equivalent employees on business days during the preceding calendar year.² As shown in Table 1, in order to determine whether an employer is a "large employer," both full-time and part-time employees are included in the calculation. "Full-time employees" are those working an average of at least 30 hours per week.³ The number of full-time employees excludes those full-time seasonal employees who work for up to 120 days during the year.⁴ The hours worked by part-time employees (i.e., those working less than 30 hours per week) are included in the calculation of a large employer, on a monthly basis, by taking their total number of monthly hours worked divided by 120.

For example, a firm has 35 full-time employees (30+ hours). In addition, the firm has 20 part-time employees who all work 24 hours per week (96 hours per month). These part-time employees' hours would be treated as equivalent to 16 full-time employees, based on the following calculation:

20 employees x 96 hours / 120 = 1920 / 120 = 16

Thus, in this example, the firm would be considered a "large employer," based on a total full-time equivalent count of 51 -- that is, 35 full-time employees plus 16 full-time equivalents based on part-time hours.

    Table 1. Determination and Potential Application of Employer Penalty for

Regardless of whether or not a large employer offers coverage, it will be potentially liable for a penalty beginning in 2014 only if at least one of its full-time employees obtains coverage through an exchange and receives a premium credit (for purposes of determining the penalty, a "full-time employee" includes only those individuals working 30 hours per week or more). As shown in Table 1, part-time workers are not included in penalty calculations (even though they are included in the determination of a "large employer"). An employer will not pay a penalty for any part-time worker, even if that part-time employee receives a premium credit. Conversely, seasonal workers are not included in the determination of large employer. However, if an employer is determined to be a large employer, without counting its seasonal workers, it could still potentially face a penalty for each month that a full-time seasonal worker received a premium credit for exchange coverage.

Beginning in 2014, individuals who are not offered employer-sponsored coverage and who are not eligible for Medicaid or other programs may be eligible for premium credits for coverage through an exchange.⁵ These individuals will generally have income between 138% and 400% of the federal poverty level (FPL).

Individuals who are offered employer-sponsored coverage can only obtain premium credits for exchange coverage if, in addition to the other criteria above, they also are not enrolled in their employer's coverage,⁶ and their employer's coverage meets either of the following criteria: the individual's required contribution toward the plan premium for self-only coverage exceeds 9.5% of their household income, or the plan pays for less than 60%, on average, of covered health care expenses.⁷

Other PPACA provisions will also affect whether full-time employees obtain premium credits for exchange coverage. For example, exchanges are required to have "screen and enroll" procedures in place for all individuals who apply for premium credits.⁸ This means that individuals who apply for premium credits must be screened for Medicaid and the State Children's Health Insurance Program (CHIP) and, if found eligible, are to be enrolled in those programs; exchange premium credits will not be an option. This could affect whether any of an employer's full-time employees obtain premium credits in an exchange -- and if so, how many.⁹

Penalty for Large Employers Not Offering Coverage

As previously mentioned, beginning in 2014, a large employer will be subject to a penalty if any of its full-time employees receives a premium credit toward their exchange plan. In 2014, the monthly penalty assessed to employers who do not offer coverage will be equal to the number of full-time employees minus 30 multiplied by one-twelfth of $2,000 for any applicable month. After 2014, the penalty payment amount would be indexed by the premium adjustment percentage for the calendar year.¹⁰

Penalty for Large Employers Offering Coverage

As previously mentioned, employers who do offer health coverage will not be treated as meeting the employer requirements if at least one full-time employee obtains a premium credit in an exchange plan because, in addition to meeting the other eligibility criteria for credits, the employee's required contribution for self-only coverage exceeds 9.5% of the employee's household income or if the plan offered by the employer pays for less than 60% of covered expenses. According to the Congressional Budget Office (CBO), about 1 million individuals per year will enroll in an exchange plan and receive a credit because their employer's plan was unaffordable.¹¹

In 2014, the monthly penalty assessed to the employer for each full-time employee who receives a premium credit will be one-twelfth of $3,000 for any applicable month. However, the total penalty for an employer would be limited to the total number of the firm's full-time employees minus 30, multiplied by one-twelfth of $2,000 for any applicable month. After 2014, the penalty amounts would be indexed by the premium adjustment percentage for the calendar year.

Finally, those firms with more than 200 full-time employees that offer coverage must automatically enroll new full-time employees in a plan (and continue enrollment of current employees). Automatic enrollment programs will be required to include adequate notice and the opportunity for an employee to opt out.¹² Although most of the provisions discussed in this report are not effective until 2014, this particular provision could be in effect as soon as the Secretary promulgates regulations.

Examples

Table 2 shows four types of scenarios reflecting health insurance offerings of large employers (columns A through D) and whether any employer penalty applies. In all the large-employer scenarios, the employer size is assumed to remain constant, at 50 full-time employees, throughout the year. The table provides examples of the penalty consequences based on whether the employer offers coverage and whether an employee receive a premium credit.¹³ The four scenarios are as follows:

Scenario A

The large employer does not offer coverage, but no full-time employees receive credits for exchange coverage. No penalty would be assessed.

Scenario B

The large employer does not offer coverage, and one or more full-time employees receive credits for exchange coverage. The annual penalty calculation is simply the number of full-time employees minus 30, times $2,000. In this example (i.e., 50 full-time employees), the penalty would not vary if only one employee or all 50 employees received the credit; the employer's annual penalty in 2014 would be (50-30) x $2,000, or $40,000.¹⁴

Scenario C

The employer offers coverage and no full-time employees receive credits for exchange coverage. No penalty would be assessed.

Scenario D

The employer offers coverage, but one or more full-time employees receive credits for exchange coverage. The number of full-time employees receiving the credit is used in the penalty calculation for an employer that offers coverage. The annual penalty is the lesser of the following:

• the number of full-time employees minus 30, multiplied by $2,000 -- or $40,000 for the employer with 50 full-time employees (i.e., 50 minus 30, multiplied by $2,000), or

• the number of full-time employees who receive credits for exchange coverage, multiplied by $3,000.

If the employer with 50 full-time employees had 10 full-time employees who received premium credits, then the potential annual penalty on the employer for those individuals would be $30,000. Because this is less than the overall limitation for this employer of $40,000, the employer penalty in this example would be $30,000.

However, if the employer with 50 full-time employees had 30 full-time employees who received premium credits, then the potential annual penalty on the employer for those individuals would be $90,000. Because $90,000 exceeds this employer's overall limitation of $40,000, the employer penalty in this example would be limited to $40,000.¹⁵

   Table 2. Potential Annual Penalties Beginning in 2014 for Large Employers

The Secretary will issue regulations requiring employers to provide employees, at the time of hiring (or for current employees no later than March 1, 2013), written notice concerning: (1) the existence of an exchange, including services and contact information; (2) the employee's potential eligibility for premium credits and cost-sharing subsidies if the employer plan's share of covered health care expenses is less than 60%; and (3) the employee's potential loss of any employer contribution if the employee purchases a plan through an exchange. Employers will be subject to this requirement beginning March 1, 2013.¹⁶

Beginning in 2014, large employers will have certain reporting requirements with respect to their full-time employees.¹⁷ As prescribed by the Secretary, they will have to provide a return including the name, address, and employer identification number; a certification as to whether the employer offers its full-time employees (and dependents) the opportunity to enroll in minimum essential overage under an eligible employer-sponsored plan; the length an any waiting period; months coverage was available; monthly premiums for the lowest-cost option; the employer plan's share of covered health care expenses; the number of full-time employees; and the name, address, and tax identification number of each full-time employee. Additionally, an offering employer will have to provide information about the plan for which the employer pays the largest portion of the costs (and the amount for each enrollment category). The employer must also provide each full-time employee with a written statement showing contact information for the person required to make the above return, and the specific information included in the return for that individual. The Secretary will work to provide coordination with other requirements, and an employer may enter into an agreement with a health insurance issuer to provide necessary returns and statements.

Conclusion

Finally, Figure 1 displays the employer requirements that may result in an employer having to pay a penalty for one or more months. Only large employers who have at least one full-time worker receiving a premium credit through an exchange plan and employ more than 30 full-time workers may pay a penalty, whether or not they provide health insurance.

 

Figure 1. Determining if an Employer Will Pay a Penalty

 

 

 

Author Contact Information

The author wishes to thank Hinda Chaikind and Chris L. Peterson, former CRS Specialist in Health Care Financing, who co-authored the original report. Jonathan Chanin contributed to this report.

² Internal Revenue Code (IRC) § 4980H(c)(2), as amended by § 1513 and § 10106 of PPACA, and as amended and renumbered by § 1003 of P.L. 111-152. The statutes use the term full-time employee in the definition of large employer, but then expand on the definition of large employer to include both full-and part-time workers. Additionally, an employer who is part of a group of employers treated as a single employer under § 414 (b), (c), (m), or (o) of the IRC (including employees of a controlled group of corporations, employees of partnerships, proprietorships, etc., which are under common control, and employees of an affiliated service group) are treated as a single employer. For employers not in existence throughout the preceding calendar year, the determination of large employer is based on the average number of employees a firm reasonably expected to employ on business days in the current calendar year. Any reference to an employer includes a reference to any predecessor of that employer.

³ IRC § 4980H(c)(4).

⁴ IRC § 4980H(c)(2)(B). In addition, an employer will not be considered a large employer if its number of full-time employees exceeded 50 for 120 days or less.

⁵ IRC § 36B(c)(2)(B) and IRC § 5000A(f).

⁶ IRC § 36B(c)(2)(C)(iii).

⁷ Under § 1411(e) and (f) of PPACA, after a person applies for premium credits in an exchange, the Secretary will notify the exchange whether the person is eligible because the enrollee's (or related individual's) employer does not provide minimum essential coverage or the coverage is unaffordable. The exchange must notify employers and inform them that they may be liable for a penalty. The Secretary must establish a separate appeals process for these employers, providing them with the opportunity to present information for review and must grant them access to the data used to make the determination. This process is in addition to any rights of appeal the employer may have under the IRC.

⁸ § 1311(d)(4)(F) of PPACA.

⁹ Originally, under PPACA § 10108, all employers, regardless of the number of employees, who offered minimum essential coverage and contributed toward that coverage, also had to provide "free choice vouchers" to employees who met certain income and other conditions. Section 10108 was repealed by P.L. 112-10.

¹⁰ Per IRC § 4980H(c)(5) and PPACA § 1302(c)(4), the premium adjustment percentage is the national average premium growth rate.

¹¹ See the CBO March 20, 2010, estimate in a letter to the Honorable Nancy Pelosi, http://www.cbo.gov/ftpdocs/113xx/ doc11379/AmendReconProp.pdf. CBO did not publish an estimate of the number of people obtaining credits due to employer plans not providing "minimum value," but that number is probably small.

¹² § 1511 of PPACA.

¹³Table 2 shows calculations for penalties on these employers in 2014 on an annual basis, rather than a monthly basis as described above.

¹⁴ Because the calculation of "large employer" includes part-time workers, but the penalty is only calculated based on full-time workers, not all large employers who have a full-time employee receiving a credit would actually pay a penalty. This could occur because the first 30 workers are not counted. For example, an employer with 100 part-time workers (15 hours per week) and 30 full-time workers (30+ hours per week) would be considered a large employer with 80 full-time equivalent workers. Even if one or more workers received a premium credit, the penalty would only be assessed against the number of full-time workers (30-30) x $2,000 = 0.

¹⁵ See previous footnote, for example of when an employer might not pay a penalty, in relation to a full-time worker receiving a premium credit.

¹⁶ PPACA § 1512.

¹⁷ PPACA § 1502.