Most people are aware by now that the Affordable Care Act (ACA) requires individuals to have health insurance coverage beginning in 2014, and that many of those individuals who purchase coverage through a government-run insurance exchange will qualify for a premium subsidy or tax credit—the government pays a portion of their premium if their income is below 400% of the Federal Poverty Level. But do you know what the consequences are for your company if one of your employees receives a tax credit?

One of the requirements to qualify for a premium tax credit is that the applicant must not have been offered employer-sponsored coverage, or that the employer-sponsored coverage is available but not “affordable.”

This is important for employers to know because, beginning in 2015, large employers (those employing more than 100 full-time employees plus full-time equivalents) must provide coverage to their full-time employees, or face penalties.

Employers should also be aware that even if they do offer coverage, a full-time employee could still receive a premium subsidy if that employee indicates on the Exchange application that he or she was not offered employer-sponsored coverage or that the coverage is not “affordable.” When this happens, the employer will receive a notification from the Department of Health and Human Services (HHS) and the IRS that the employer may be subject to a penalty based on the employee’s eligibility for a subsidy. This is known as a Section 1411 Certification.

What is “minimum value”? The “minimum value” (MV) standard means the plan has to pay at least 60% of the total allowed benefits covered by the plan.

What is “affordable” coverage? “Affordable” means the employee’s share of premiums—based on the cost of the cheapest self-only plan meeting the minimum value standards—is less than 9.5% of the family’s income.

How much are the Potential Penalties?

If at least one employee receives a premium subsidy from an Exchange, the employer could be subject to a penalty known as the Employer Shared Responsibility Payment. If coverage was not offered to at least 70% of full-time employees in 2015, the penalty will be $2,000 times the number of full-time employee minus 30.

If an employee receives a premium subsidy and the employer offered coverage but that coverage does not meet minimum value or is not affordable, the fine is $3,000 per employee receiving the credit. This penalty is capped at the penalty the employer would pay for not offering coverage.

How will an employer know if it has to pay a fine?

Federal regulations require the Exchange to notify an employer when an employee has qualified for the premium subsidy, thus triggering the Shared Responsibility Payment. This notice will:

  1. Identify the employee,
  2. Indicate that the employee is eligible for a subsidy,
  3. Advise the employer that if it has 50 or more employees, the employer may face a penalty, and
  4. Advise the employer of the right to appeal the determination.

The IRS has also stated that it will notify employers to inform them of their potential liability and provide them with an opportunity to respond before they have to pay. This will not happen until after the deadlines for filing individual income tax returns for the previous year, and after the deadline for employers to file the information returns identifying their full-time employees and describing the coverage that was offered (if any).

How will this information be verified?

The Exchange is required to verify whether the information provided by the employee is accurate. The regulations contemplate an electronic verification system which is not yet in place. However, in 2013, HHS released proposed regulations which would also permit the Exchange to use a randomized process to manually verify the information provided. Under these proposed regulations, the Exchange could also verify the information provided by accessing data provided to the SHOP Marketplace, or by contacting the employer directly to verify the applicant’s employer-sponsored coverage.

Can an employer appeal the decision?

When the Exchange determines that an employee is eligible for a premium subsidy and notifies the employer, the employer has the right to appeal that determination within 90 days of receiving notice. The employer can present additional information to the Exchange about the coverage it offers, and it can access the data which was used to make the determination.

Leave a comment to let us know if you want to know more about the Employer Shared Responsibility or any other aspect of the ACA. We’ll address your question in a future post.

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This article refers to all regulations issued through April 1, 2014.  It is intended to be a summary of important issues and should not be considered legal or tax advice.

© Bell Associates and “Ask the Professionals,” 2014. Unauthorized use and/or duplication of this material without express and written permission from Bell Associates is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Bell Associates and “Ask the Professionals” with appropriate and specific direction to the original content.