Large Employer Health Coverage Excise Tax
Applicable Large Employers (ALEs), generally those with 50 equivalent full-time employees in the prior calendar year, that:
o Do not offer coverage for all its full-time employees,
o Offer minimum essential coverage that is unaffordable (employee contribution is more than 9.66%* of the employee's household income), or
o Offer minimum essential coverage where the plan's share of the total allowed cost of benefits is less than 60%,
are required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a government Marketplace and qualified for a premium tax credit.
- The 9.66% of household income is annually inflation-adjusted and is the value for 2016.
Note: Whether an employer is required to offer insurance is not based solely on the number of full-time employees, but includes the number of comparable part-time employees determined by the number of hours worked by part-time employees. The total is referred to as equivalent full-time employees. However, the employer is only required to offer insurance to the full-time employees.
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Interaction with Premium Tax Credit
Generally, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, he is not eligible for a premium tax credit and cost-sharing reductions for health insurance purchased through a government Marketplace. However, if the coverage is unaffordable (see above) or the plan’s share of benefits is less than 60%, then he is eligible, but only if he declines to enroll in the coverage and purchases coverage through the Marketplace instead. |
Phase-in Provisions – The ALE penalty was originally scheduled to apply for tax year 2014, but its implementation was delayed and eased by a "phase-in" rule for employers with 100 or more equivalent full-time employees. Under the revised rules an employer won't owe a penalty for failing to offer health coverage so long as it offers coverage to at least 70% of its full-time employees in 2015, and 95% in 2016.
For employers with 50-99 full-time employees, implementation has been delayed until 2016 provided that the employer meets certain requirements. To qualify an employer must meet the following conditions:
(a) The employer must employ on average at least 50 full-time employees (including full time equivalents (FTEs)), but fewer than 100 full-time employees (including FTEs) on business days during 2014.
(b) During the period beginning on February 9, 2014, and ending on December 31, 2014, the employer cannot reduce the size of its workforce or the overall hours of service of its employees in order to satisfy the workforce size condition set forth at (a) above.
(c) The employer cannot eliminate or materially reduce the health coverage, if any, it offered as of February 9, 2014. There are exceptions to this rule for certain small reductions if the employer does not alter the terms of its group health plans to narrow or reduce the class or classes of employees (or the employees' dependents) to whom coverage under those plans was offered on February 9, 2014.
(d) The employer certifies on a prescribed form that it meets the eligibility requirements set forth in paragraphs (a) through (c) above.
Penalty - Employer Not Offering a Health Care Plan – An applicable large employer is liable for the penalty (figured monthly) if the employer:
1) Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.
The excise tax penalty for any month would be $167 ($2,000/12) times the number of full-time employees in excess of 30.
Example – No Health Care Plan – In January of 2016, an applicable large employer with 120 employees does not offer a health care plan to its employees The penalty is $167 times the number of full-time employees in excess of 30. Thus, the penalty for the month of January is $15,030 ((120-30) x $167.00).
Penalty – Employees Qualify for Premium Tax Credits or Cost-Sharing Assistance – An applicable large employer would be liable for the penalty (figured monthly) if the employer:
(1) Offers to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and
(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee;
The excise tax penalty for any month would be $250 ($3,000/12) times the number of full-time employees that receive a premium tax credit or cost-sharing reductions through a government Marketplace but not to exceed the penalty imposed had the employer not offered health care insurance.
Example – Health Care Plan but Employees Qualify for Premium Tax Credit or Cost Sharing Reductions – In January of 2016, an applicable large employer with 120 employees offers a health care plan to its employees, but the cost of the plan does not meet the affordable criteria (employee contribution is more than 9.66% of the employee's household income or the plan's share of the total allowed cost of benefits is less than 60%) and 20 of the employees sign up for the insurance through an exchange and receive Premium Tax Credit or Cost-Sharing Reductions. The employer’s excise tax penalty is $250 times 20. Thus, the penalty for the month of January is $5,000.
Penalty – Decision Tree – The flow chart below provides an overview of the large employer health care excise tax.
Applicable Large Employer - An “applicable large employer” is one that employs an average of at least 50 “equivalent full-time employees” on business days during the preceding calendar year (for an employer that wasn't in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed on business days in the current calendar year). But under an exemption, an employer will not be considered to employ more than 50 full-time employees if: (a) the employer's workforce exceeds 50 full-time employees for 120 days, or fewer, during the calendar year; and (b) the employees in excess of 50 employed during that 120-day (or fewer) period were seasonal workers, e.g., retail workers employed exclusively during the holiday season. Special rules apply to construction industry employers.
Part-Time Employees - Solely for purposes of determining whether an employer is an applicable large employer, an employer will also have to include for that month the number of full-time employees determined by dividing (a) the aggregate number of hours of service of employees who are not full-time employees for the month by (b) 120.
Example – Equivalent Full-Time Employees - For his business, John has 45 full-time employees plus he has 20 part-time employees. His part-time employees for the month of January worked 960 hours. That is the equivalent of 8 (960/120) full-time employees. Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8).
Penalty Deductibility – This excise tax penalty is nondeductible under the general rules for excise taxes.
Employer Reporting Requirements - Applicable Large Employers, generally employers with 50 or more equivalent full-time employees in the previous year, must file with the IRS a Form 1095-C for each full-time (for any month of the year) employee (along with a Form 1094-C Transmittal). This filing requirement exists even though employers with fewer than 100 equivalent full time employees generally are exempt from the penalty for 2015. Employers with fewer than 50 EFTEs do not have a 1095-C reporting requirement. A copy of the Form 1095-C must be provided to the employee.
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