The IRS Letter 226-J serves to inform employers when they are being assessed a penalty under the Employer Shared Responsibility Provision (ESRP) of the Affordable Care Act (ACA). (Note: Only applicable large employers [ALEs – those with 50 or more full-time employees] are required to comply with the ACA.)
These penalty calculations are based on data provided by forms 1094 and 1095 submitted to the IRS. The Letter 226-J contains the proposed penalty amount and states whether it is an “A” or “B” penalty. The first step in understanding exactly how penalties are calculated is to understand the two different employer shared responsibility payments – the first under Penalty A and the second under Penalty B.
Penalty A – Employer Shared Responsibility Payment for Failure to Offer Minimum Essential Coverage.
In general, the ALE member will owe this first type of employer shared responsibility payment if, for any month, it does not offer minimum essential coverage to at least 95 percent of its full-time employees (and their dependents), and if at least one full-time employee receives the premium tax credit for purchasing coverage through the Marketplace.
How is This Payment Calculated?
If an ALE member is subject to the employer shared responsibility payment under Penalty A, the annual payment will be $2,000 for each full-time employee (without regard to whether each employee received a premium tax credit), after excluding the first 30 full-time employees from the calculation. If the ALE includes multiple ALE members, the 30 reduction is distributed ratably across the controlled group based on each ALE member’s number of full-time employees.
The IRS will determine whether an ALE member owes this payment on a month-by-month basis. Thus, an ALE member who owes the payment will pay $166.67 (1/12 of $2,000) per month per full-time employee.
Part-time employees and full-time equivalent employees do not factor into this calculation. Also, certain full-time employees are not included in this payment calculation, for example, very generally, a full-time employee in a waiting (non-assessment) period. However, full-time employees with coverage from the employer or from another source do factor into this payment.
Penalty B: Employer Shared Responsibility Payment for Failure to Offer Affordable Minimum Essential Coverage that Provides Minimum Value.
Even if an ALE member offers minimum essential coverage to a sufficient number of full-time employees (and their dependents) so as not to be liable for the employer shared responsibility payment described under Penalty A, the employer will still owe the second type of employer shared responsibility payment for each full-time employee (if any) who receives the premium tax credit for purchasing coverage through the Marketplace. In general, a full-time employee could receive the premium tax credit if:
- the minimum essential coverage the employer offers to the employee is not affordable;
- the minimum essential coverage the employer offers to the employee does not provide minimum value; or
- the employee is not one of the at least 95 percent of employees offered minimum essential coverage.
An employer may be subject to this payment for a month only if it is not subject to the first type of employer shared responsibility payment (payment for failure to offer minimum essential coverage under Penalty A) described above.
How Is This Payment Calculated?
If an ALE member is subject to the employer shared responsibility payment under Penalty B, the annual payment will be $3,000 for each full-time employee who received the premium tax credit.
The IRS will determine whether an ALE member owes this payment on a month-by-month basis. Thus, an ALE member who owes the payment will pay $250 (1/12 of $3,000) per month for each full-time employee who received the premium tax credit. (Unlike the first employer shared responsibility payment under Penalty A, this calculation does not include full-time employees who enrolled in coverage under the employer’s plan, or who had other non-Marketplace coverage, or who did not have any coverage.)
The total amount of this second type of employer shared responsibility payment cannot exceed the amount that the employer would have owed had it been liable for the first type of employer shared responsibility payment, described above. This limitation ensures that the payment for an employer that offers minimum essential coverage can never exceed the payment that the employer would owe if it did not offer minimum essential coverage.
Exactly How are ACA Penalties Calculated?
Employers have received IRS letters 226-J outlining the Employer Shared Responsibility Provisions/Penalties, but how did the IRS come up with the totals? Find out!