ACA Penalties and How to Avoid Them
Avoiding ACA penalties has become a key goal for many HR departments. While many of the rules are complicated, there are ways to avoid penalties.
Here's a summary of the most important rules and fines under the ACA and how to avoid them.
Minimum Essential Coverage
The Rule
Large employers are required to offer minimum essential coverage to 95 percent of full-time employees and their dependents.
The Fine
The employer would owe a penalty of $2,000 per year times the number of full-time employees minus 30. The $2,000 amount is indexed by the IRS and increases slightly every year.
Tips to Avoid Being Fined
1. Adopt an HR policy that offers minimum essential coverage under an employer-sponsored plan to all full-time employees.
2. Obtain written waivers from all full-time employees who decline coverage under your plan.
Affordable and Minimum Value
The Rule
In addition to offering minimum essential coverage, large employers must offer coverage that is both affordable and provides minimum value. A plan is "affordable" if the employee's required contribution toward the cost of self-only coverage is 9.5 percent or less (which gets indexed every year; for 2016 the percentage is 9.66) of the employee's W-2 wages. For plan years beginning in 2017, a plan will be considered affordable if the cost of employer-only coverage does not exceed 9.66% of an employee's annual household income. The same affordability percentage should be used by employers whiel applying the three IRS affordability safe harbors, specifically the W-2, rate of pay, and federal poverty line safe harbors. A plan provides "minimum value" if it pays for at least 60 percent of medical expenses on average for a standard population.
The Fine
The employer would owe a penalty equal to $3,000 times the number of full-time employees who receive a subsidy. However, the penalty can never be higher than the penalty for failing to offer minimum essential coverage. These penalty amounts are also indexed and go up each year.
Tips to Avoid Being Fined
1. Consider using the minimum value calculator provided by the Department of Health and Human Services. Plans with nonstandard features are required to obtain an actuarial certification for the nonstandard features.
2. Use safe harbors provided by the IRS. These safe harbors determine if coverage is affordable by making sure the employee's share of the premium does not exceed 9.5 percent of their W-2 wages or their computed monthly wages — equal to 130 hours times the rate of pay.
IRS Forms
The Rule
According to the IRS, "the Affordable Care Act added section 6056 to the Internal Revenue Code, which requires applicable large employers to file information returns with the IRS and provide statements to their full-time employees about the health insurance coverage the employer offered."
The Fine
Penalties can be imposed on large employers for failing to timely file information returns or furnish the statements. The basic penalty for failure to file or furnish a correct information return or payee statement is $260, and the standard annual penalty cap is $3 million. (Note: if the failure relates to both an information return and a payee statement, the penalties are doubled (i.e., to $520 per statement and an over $6 million cap.)) However, penalties may be waived with proof of reasonable cause.
Tips To Avoid Being Fined
The IRS has announced that it will not impose these penalties on large employers that can show they have made good faith efforts to comply with the reporting requirements. The relief is available, however, only where compliance is timely.
Waiting Periods
The Rule
The ACA provides that a group health plan shall not apply any waiting period that exceeds 90 days.
The Fine
Failing to comply with the ACA's waiting period rules may result in the imposition of the ACA's standard penalty for noncompliance (an excise tax of $100 per day, per affected individual).
Tips To Avoid Being Fined
1. Adopt a standard HR policy that ensures all new employees are offered coverage that begins within 90 days after their employment commences.
2. If you correct the failure within 30 days, the penalty does not apply.
3. If you show the failure was due to reasonable cause, and not willful neglect, the penalty does not apply.
4. Start documenting, gathering and storing data early, giving yourself time to QA test and meet the deadlines.
5. Consider using an expert you can partner that will work with you to get your systems, processes and staff working together towards compliance.
Besides being aware of the above ACA penalties and preparing to stay in compliance to avoid them, employers can consult ACA Best Practices: Why You Can't Take a Vacation From Affordable Care Act Compliance for further guidance.
