The Patient Protection and Affordable Care Act (PPACA), commonly known as Obamacare, levies hefty penalties on employers who do not comply with key provisions of the law.

The Employer Mandate Penalty

Also known as the “pay or play” provision, the employer mandate stipulates that companies with 50 or more full-time equivalent employees must offer a health plan with minimum essential coverage to a minimum of 95% of their full-time workforce and dependents up to age 26. Failure to do so triggers a penalty under Section 4980H(a) of the Internal Revenue Code.

The 2024 employer mandate penalty is $2,970 per full-time employee, excluding the first 30 workers. For example, an employer with 100 full-time employees that does not offer coverage would pay $207,900 (100 – 30 = 70 x $2,970). This assumes at least one employee obtains subsidized marketplace coverage.

The Affordability Penalty

Even if an employer offers coverage, they may still face penalties under Section 4980H(b) if the plan fails to meet minimum value or affordability standards. This occurs when an employee obtains subsidized marketplace coverage because the employer’s plan is unaffordable or does not meet minimum value. The monthly penalty equals $4,460 (for 2024) divided by 12 for each full-time employee who receives subsidized marketplace coverage. The total penalty cannot exceed the amount the employer would pay if it offered no coverage.

For a company with 300 full-time employees, the maximum monthly penalty would be $66,825 (300 – 30 = 270 x $2,970/12). However, the actual penalty would depend on how many employees obtain subsidized marketplace policies.

Avoiding Penalties

To avoid these penalties, coverage must be offered, and it must provide minimum essential coverage, meet minimum value and affordability tests. Minimum essential coverage means the health plan is employer sponsored. Minimum value means the plan pays for at least 60% of covered health expenses. Affordability means employee premium contributions do not exceed 8.39% of household income in 2024. Employers can use safe harbors based on W-2 wages, or rate of pay, or Federal Poverty Level to assess affordability.

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Copyright © 2023 Smarts Publishing. This is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.