ACA Penalties Rise Again in 2020

The IRS has released updated penalties for Affordable Care Act non-compliance. As has been the common practice since the first year of mandatory reporting for Applicable Large Employers (ALEs), the penalties for failure to offer coverage to “substantially all” of your full-time employees, or failure to offer coverage that was “affordable” or offered “minimum value” has increased with inflation.

Here are the new penalty rates, as well as some common misconceptions about ACA penalties.

The Common Misconceptions With ACA Penalties

There are a couple of common misconceptions when it comes to understanding ACA non-compliance penalties.

1. The penalties are assessed monthly, not annually. That means that the IRS takes the full penalty and applies a prorated penalty for those months that you’ve been out of compliance.

For example, if one of my full-time employees went to the exchange after I failed to offer that employee coverage in January, and then I extended an offer of coverage in May, then I would only be out of compliance for four months (Jan-April) of the coverage year. The IRS would only hit me with 4/12ths of the penalty.

2. Penalties currently have a two-year tail. That means that employers aren’t getting notices of penalties incurred in 2015 until 2017, or 2016 until 2018. At that point, there is no way of retroactively offering coverage. You either prove that you are compliant and that the IRS got it wrong, or pay the fine.

What are the Current Penalties

There are two primary penalties associated with the Employer Shared-Responsibility “Pay-or-Play” portion of the ACA:

• 4980H(a) Penalty: The “sledgehammer” penalty incurred when an employer fails to offer coverage to “substantially all” (95%) of its employees. This is assessed against the entire full-time employee population.
• 4980H(b) Penalty: The “tack-hammer” penalty incurred when an individual who should be eligible for employer-sponsored health coverage does not receive a qualifying or affordable offer from his or her employer, and receives a subsidy at the exchange. This is assessed against the individual employee.

Originally $2000 and $3000 respectively, the penalties have grown with inflation each year as follows.

Employers found to be out of compliance by the IRS will receive a letter (Notice 226-J) which will include instructions to employers for payment or disagreement. The penalties are subject to interest until paid in full.