ACA Employer Mandate: Here’s How to Avoid Tax Penalties

As an insurance broker, you balance a lot of rules, regulations and requirements for your clients. When it comes to the Affordable Care Act (ACA), you may feel like you’re juggling chainsaws. The ACA does a lot of good for a lot of people, but it also presents some unique challenges you (and your clients) need to know about.

Here’s your guide to the ACA Employer Mandate and how to keep penalties off your tail in tax year 2023.

Pay or play

The ACA was officially enacted in 2010, but things started getting particularly interesting for employers in 2014. That’s when the employer shared responsibility provisions officially kicked in.

It all boils down to this: Applicable large employers can either provide minimum essential coverage (MEC) or potentially pay a fine. That’s why this rule is sometimes called the “pay or play” provision.

If an employer provides the right coverage for the right people, there’s no need to worry about noncompliance penalties. If, on the other hand, an employer chooses not to provide coverage or offers something that doesn’t count, the IRS might come knocking.

Noncompliance penalties for tax year 2023

Let’s say you have a client who’s paying instead of playing. Let’s break down the details:

1. Types of penalties

There are different noncompliance penalties, depending on what exactly an employer did wrong:

4980H(a)

The first penalty is called 4980H(a). To incur this fee, an employer must meet two requirements:

• It didn’t offer MEC to at least 95% of its full-time employees and their dependents.
• At least one of its full-time employees didn’t receive a MEC offer and purchased coverage through the Health Insurance Marketplace, which means the employee got a premium tax credit (PTC) for the full year.

For tax year 2023, the 4980H(a) penalty is $240 per month for every full-time employee, or $2,880 per employee per year. The first 30 employees are considered an exemption and don’t count toward this penalty. Beyond that number, however, it takes only one employee PTC to let the IRS know something’s wrong.

4980H(b)

The second penalty type gets into the weeds of the ACA and its technical definitions. Keep in mind that to be fully compliant, an employer must:

1. Offer affordable coverage.
2. Offer coverage that provides minimum value.
3. Cover at least 95% of employees.

To incur the 4980H(b) penalty, one or more of the following situations must occur:

• An employer offers MEC that costs more than 9.12% of an employee’s pay, which exceeds the IRS’ 2023 mandate for affordability.
• An employer offers MEC that covers less than 60% of costs, which means it doesn’t meet the definition of minimum value.
• An employee who isn’t one of the 95% purchases coverage through the Marketplace and receives the PTC.

For tax year 2023, the 4980H(b) penalty is $360 per month, or $4,320 yearly per employee.

2. Penalty calculation

Brace yourself — it’s time for a little math.

4980H(a) penalty

If this penalty is triggered, an employer must pay $2,880 for every employee minus the first 30. That’s every full-time employee, including those who have the company’s MEC or any other coverage. Long story short, a company with 200 employees could end up owing $489,600 in fees ([200 – 30] x 2,880) for a single tax year.

4980H(b) penalty

This penalty is calculated in much the same way — $4,320 for every full-time employee minus the first 30. But there’s a caveat: The total payment can’t exceed the amount the employer would have paid in 4980H(a) fees.

Why it matters

Here’s why ACA, MEC and their associated penalties matter to brokers:

• Not all employers are liable: According to the IRS, most employers won’t meet the threshold for full-time employees and won’t be liable for the penalty, which means these fees may not matter to some or all of your clients.
• Not all coverage counts: You need to know what is and isn’t considered MEC so you keep your clients compliant.
• Penalties keep going up: The IRS has steadily increased the employer shared responsibility payment to reflect inflation. The yearly fee went up $130 between 2022 and 2023 — part of a startling $880 increase since its inception in 2014.

Want to hit all these birds with one stone? Brush up on MyMEC plans from MagnaCare.

MyMEC plans help employers meet ACA requirements and provide necessary benefits for full-time employees. That means no penalties — plus a lot less confusion, legwork and headaches.

Learn more about MagnaCare MyMEC plans today.