ACA won’t go away: Are you at risk for being fined?

ACA is here to stay, which means the IRS is more staffed than ever to manage it and uphold compliance. With more organizations being fined for missteps in their reporting, now is the time to look at your processes.

What is ACA?

ACA is the Patient Protection and Affordable Care Act. The ACA has three primary goals:

Make affordable health care more available
Expand Medicaid
Support methods that are designed to lower cost of medical care delivery

Increased IRS funding

The Internal Revenue Service (IRS) is looking toward a large increase in funding following the Inflation Reduction Act that was signed in August of 2022.

What does this mean for you?

Not only will the IRS consistently be improving its ACA enforcement, but there will also be little margin of error for large employers subject to ACA rules to make mistakes. This is due to no more “good faith” relief for reporting mistakes and no statute of limitations for Employer Shared Responsibility Payment (ESRP) penalties.

Changes for 2023

Decrease in affordability percentage

The IRS announced that the ACA affordability percentage, which is used to determine compliance with certain aspects of the employer mandate, will decrease from 9.61% in 2022 to 9.12% in 2023 of the employee’s household income. In addition to making it more difficult to use the federal poverty level safe harbor, this will change the rate of pay and Form W-2 safe harbor calculations, and may mean that employees you were able to claim a safe harbor on for 2022 no longer qualify.

When any one of those employees works at a full-time level under ACA rules and obtains subsidized coverage in the Marketplace, they can trigger a potential ACA penalty for you. This makes managing Internal Revenue Code 4980H(b) penalty (affordability) liability more challenging for employers. With the lowest affordability percentage to date making it more difficult to use the federal poverty level safe harbor, it will also change the rate of pay, and Form W-2 safe harbor calculations. Read more from this IRS notice

Enhanced ACA subsidies

With new legislation, the premium tax credit eligibility has expanded.

Individuals with incomes of up to 150% of the Federal Poverty Level (FPL) can obtain coverage for $0 a month.
Individuals that have incomes between 150% - 400% of the FPL have phased relief
Individuals with an income of 400%+ FPL cannot pay more for coverage than 8.5% of their household income¹

The American Rescue Plan

Since the passage of the American Rescue Plan of 2021, commonly referred to as the COVID-19 Stimulus Package, more Americans have been encouraged or incentivized to purchase health insurance coverage. The Marketplace saw a record breaking 35 million+ Americans electing for coverage under this expanded provision of the ACA.[2]

Possible costs for employers

Although the American Rescue Plan sounds like it allowed employees to obtain coverage easier, it could come at a cost to your organization or you as an employer.

The path looks like this:

More people are eligible for subsidies.
So more people take advantage of subsidies and elect coverage on the Marketplace.
This means employers receive more notices about employees getting Marketplace coverage.
This requires your team to do more follow up and respond to more notices.
This leads to more potential penalty risk if employees who should have been made affordable offers of coverage receive a PTC for coverage on the Marketplace.

The Family Glitch

Previously, if you offered an employee coverage that is “affordable” based on the cost to cover just the employee, then no one in that family could qualify for subsidies for Marketplace coverage. This is what is referred to as the Family Glitch.

Your employees, if they were not offered affordable employer-sponsored coverage, are potentially eligible to receive a premium tax credit for coverage purchased in Marketplace. This is due to the ACA basing its affordability on the lowest cost plan available at the employee-only level.

$187.40 is the maximum contribution a month an employee-only plan can be if the employee makes $15 an hour and works 130 hours in a month.

Fixing the glitch

In April of 2022, the IRS and US Treasury Department proposed a new rule to correct the Family Glitch.

The old rule makes the entire family’s eligibility for subsidies based on the cost of the lowest cost employee-only coverage, while the proposed rule determines subsidy eligibility based on the cost to cover employee plus members of their family (as applicable). This regulatory fix goes into effect for 2023, with a separate affordability calculation for family coverage. This could result in family members being eligible for premium tax credits if the employee is not.

Impact of the proposed rule on employers

IRS reporting will stay the same for employers. The employer affordability calculation and safe harbor selections have not changed.

Getting the ACA right

Some employers may struggle with identifying their full-time employees, understanding measurement periods, and coding the forms correctly. There’s a lot to keep up with, but it’s important for employers to fulfill their compliance obligations correctly to avoid penalties.

2022 IRS Penalties

Failure to File and/or Furnish 1095: up to $280/$560 per return for 2022³

Number of Late, Inaccurate, or Incomplete Forms	Total (up to)
55	$15,400
125	$35,000
55 (late furnishing to employees and late filing with IRS)	$30,800
125 (late furnishing to employees and late filing with IRS)	$70,000

Penalty A

To trigger this penalty, a full-time employee has to go to Marketplace and receive a premium tax credit, and their larger employer did not offer minimum value coverage to at least 95% of full-time employees. The larger the employer, the greater the risk. Penalty “A” (for 2022) is $2,750 per employee on an annual basis.⁴

Full Time Employees	2022 Potential Penalty "A" Annually
100	$192,500
250	$605,000
500	$1,292,500
1,000	$2,667,500
1,500	$4,042,500

*It is important when calculating the penalty to calculate the total number of full-time employees minus 30 employees.

Penalty B

The way to trigger this penalty is the same as the way to trigger Penalty “A”. A full-time employee must go to Marketplace and receive a premium tax credit. However, for Penalty “B” it goes a little further. This penalty may occur when coverage was not offered for full-time employees or when coverage was unaffordable. To calculate this penalty, you only look at the number of employees that triggered it and multiply that number by $4210 on an annual basis.⁵

No. of Employees that Triggered Penalty	2022 Potential Penalty "B" Annually
5	$20,600
10	$14,200
15	$61,800
20	$82,400
25	$103,000

Common Mistakes in ACA Reporting

Many employers could fill out their forms incorrectly. These mistakes could be due to:

Outdated or nonexistent ACA processes due to inadequate tracking of hours. Not knowing who a full-time employee is. Poor handling of employment breaks, leaves of absence, new hires, termination, and position changes
Inaccurate reporting including, coding errors, “over-reporting”, and choosing the wrong safe harbor
Lack of documentation

Is “Affordable” the right choice?

ACA-defined “affordability” isn’t necessarily beneficial to employees if it makes them ineligible for a premium tax credit from the Marketplace. However, it could mean there’s an option that offers more overall savings than the employer-sponsored plan. The ACA is considered to have “Pay or Play” model operations. This is because employers can choose whether and how to offer coverage, or if preferred, they can pay the IRS.

Many employers have begun to consider providing a plan that meets ACA standards to avoid the “A” penalty but not making it affordable. This then puts them at risk for the “B” penalty.

A question to ask yourself as an employer

Is paying the “B” penalty when full-time employees qualify for a Marketplace subsidy more or less expensive than making coverage affordable?

ACA compliance can be a lot to manage. If you’d like assistance, contact your American Fidelity account manager.

This blog is up to date as of October 2022 and has not been updated for changes in the law, administration or current events.