A recent IRS information letter in response to a legislator’s inquiry gave clear instruction on the continued applicability of the ‘Pay or Play’ penalty and further clarification on whether certain exceptions apply. Specifically, the legislator asked whether Affordable Care Act (ACA) penalties were waived based on certain factors and whether there was still transition relief available. While these provisions of the ACA have been on the books for years, implementation and enforcement of the provisions has been slow, leading to a lax approach to compliance on the part of some employers. With the IRS now sending out penalty notices, businesses are asking their legislators if any relief from the penalties is available.
Employer Shared Responsibility
The legislator’s question focused on the employer shared responsibility provisions in the ACA which state that certain applicable large employers (ALEs) must offer minimum essential coverage in an affordable manner or make an employer shared responsibility payment to the IRS. This is sometimes referred to as the ‘pay or play’ provision of the ACA. ALEs are businesses that had an average of 50 full-time and full-time equivalent employees in the previous calendar year and can be any type of organization from a for-profit business to a charity. The payment is designed to encourage employers to provide ACA-compliant healthcare options to their employees.
‘Pay or Play’ Penalty
ALEs are liable for penalties if they fail to offer qualifying health insurance to employees and their dependents. Health insurance offered to employees must be affordable and must also provide minimum value to the participant. Essentially you must play by the rules of the ACA or pay a penalty to the IRS equal to (for 2019):
- $2500 for every full-time employee (minus the first 30) for failure to offer ACA-compliant coverage to “substantially all” (95 percent) full-time employees and dependents; or
- $3750 per full-time employee who is eligible for a premium tax credit or subsidy (i.e., the employer offered coverage but it was not affordable)
Transition Relief
While the law does not provide for a waiver from the aforementioned penalties, there were several types of transition relief available in 2015 and 2016, but not for subsequent years. From the IRS’s perspective, employers have had several years to bring their benefits programs into compliance with ACA standards, and they have known all along when the transition relief period was going to end.
This transition relief was previously offered to ALEs with more than 50 but less than 100 full-time employees and since enforcement of penalties was slow, and many businesses assumed those waivers would remain in place. Businesses who have already received penalty notices for a prior year should keep in mind that the penalty amount increases annually and is assessed per full-time employee. Therefore, if corrections have not been made for subsequent plan years, the employer will likely receive another penalty letter.
‘Hardship’ Waivers
Employers with less than 100 employees were originally offered a hardship waiver, as they are at the low end of what would qualify as an ALE, and the transition to ACA compliance was the most difficult for their organizations. In addition, a January 2017 executive order gave agencies the discretion to waive regulatory burdens caused by the ACA. Based on this executive order, many businesses believed that the IRS would continue the hardship waivers and allow them more time to transition from their existing benefit plans to ACA-compliant plans.
The IRS points out that the provisions and penalties regarding ALEs are legislative and not regulatory in nature. Because the executive order only gives agencies discretion to waive burdens caused by regulations, the IRS will follow the ACA’s legislative provisions and require ALEs to follow the law or pay penalties for 2018 and going forward. The amount of these penalties will increase based on an annual index.
If your business is facing a penalty notice from the IRS, or if you need help reviewing your benefit plans to ensure they are in compliance, reach out to our team. The Hall Benefits Law team works with plan sponsors to achieve compliance for health and welfare plans, retirement plans, and other employee benefit plans.To learn more about our expertise and the services we offer, call 678-439-6236, or visit the
Hall Benefits Law website
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