The Inflation Reduction Act Made it Clear That Employers Must Comply with The Affordable Care Act.
The Inflation Reduction Act:
Over the next 3 years, the IRS is set to hire over 20,000 new agents. As a result of the Biden administration’s Inflation Reduction Act which gives the IRS over $80 billion in additional funding. This investment into the IRS is aimed to improve tax enforcement and customer service. Which means that employers who fail to comply with tax laws are at an increased risk of being fined by the IRS.
A Brief History of the Affordable Care Act:
The Patient Protection & Affordable Care Act (ACA) is a comprehensive health care reform law enacted in March 2010 under the Obama administration. The law was passed in hopes of achieving the following 3 goals:
- Make affordable health insurance available to more people
- Expand the Medicaid program to cover all adults with income below 138% of the FPL
- Support innovative medical care delivery methods designed to lower the costs of health care.
What’s Changed About The Affordable Care Act in 2024?
Affordability Rate Percentage Decreases
The Affordable Care Act is a living document, meaning that their are aspects that are subject to change which employers must be aware of. The IRS announced that for 2024, that the ACAs affordability percentage decreased from 9.12% in 2023 to 8.39% in 2024 of the employee’s household income. This change will make it harder to use the federal poverty level safe harbor. It will also affect the rate of pay and Form W-2 safe harbor calculations. This means that some employees who qualified for the safe harbor in 2023 may no longer qualify.
Amplified ACA Subsidies
Additionally, the eligibility for employees to receive a premium tax credit was increased, putting employers at a greater risk of being fined.
- Individuals with incomes of up to 150% of the Federal Poverty Level (FPL) can obtain coverage for free.
- Individuals that have incomes between 150% - 400% of the FPL have phased relief
- Individuals with an income of 400%+ FPL cannot pay more for coverage than 8.39% of their household income
American Rescue Plan - AKA the Covid Stimulus Package
As a result of the American Rescue Plan (Covid Stimulus), Americans have been more incentivized to obtain marketplace coverage. Since 2021, a record 35+ million US citizens obtained insurance coverage through the marketplace.
What Threat Do the 2024 ACA Changes Pose to Employers?
Looking at the post-covid landscape of 2024, it’s apparent the US government has placed an emphasis on ensuring that citizens have increased access to health care. A step in the direction for improving overall public health. However, these changes do expose employers to increased risk when it comes to being fined by the IRS.
- More of the population is eligible to receive a premium tax credit for marketplace coverage.
- Therefore, more people are enrolling into marketplace insurance place.
- Resulting in employers seeing increased IRS fines for failing to offer an ACA compliant plan.
ACA Penalties Issued By The IRS:
4980H(a) penalty:
The IRS issues a 4980H(a) penalty when an organization fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time employees and their dependents, and any full-time employee obtains coverage on the exchange. The first 30 are not included in the penalty.
4980H(b) penalty:
The IRS issues a 4980H(b) penalty is assessed when an employer offers its full-time employees coverage that was either unaffordable, not Minimum Value, or both, AND had one of the employees receive a PTC from a state or federal health exchange.
Filing & Furnishing Penalties:
Failing to file the required information with the IRS properly and on-time may result in the ALE being penalized under sections 6721 and 6722 under the IRC. These are the same penalties that other information returns are subject to, such as W-2s, if the returns are not filed accurately and timely. It’s vital to note that there is no relief for failure to file or furnish in a timely manner.
Penalty Dollar Amounts and Limitations:
If you are required to file 250 or more information returns, you must file electronically. The 250-or-more requirement applies separately to each type of form filed and separately for original and corrected returns. For example, if you must file 500 Forms 1095-B and 100 Forms 1095-C, you must file Forms 1095-B electronically, but you are not required to file Forms 1095-C electronically.
- IRC Section 6721: Provides for a penalty when an information return or statement is not timely and/or correctly filed by the due date of the return.
- IRC Section 6722: Provides for a penalty when a payee statement is not timely and/or correctly furnished
How to Ensure You’re Health Plan is Compliant
Calculating Affordability:
To calculate the affordability of your health plan, start by identifying the lowest wage earned by any of your full-time employees. For this example we’ll use the federal minimum wage (which will provide the lowest potential cost a health plan can be according to the affordable care act).
- Federal Minimum Wage = $7.25
- Full-Time-Equivalent Hours (Monthly) = 130
- Employee's total monthly salary = $942.50
- ACA affordability percentage that is subject to annual change via inflation = 8.39%
Maximum Employee Only Contribution = $79.00
Filing with the IRS
Applicable Large Employers (ALEs) with 50 or more employees in the previous calendar year are required to file the information required under sections 6055 and 6056 of the Affordable Care Act.
Section 6055:
Requires every provider of minimum essential coverage to report coverage information by filing an information return with the IRS and furnishing a statement to individuals.
Section 6056:
Requires employers to file information returns with the IRS about whether they offered health coverage to FTE employees (and dependents) and, if so, information about the offer of coverage
Filing Instructions:
Form 1094-C:
This form is used to report the IRS summary information for each Applicable Large Employer and to transmit forms 1095-C to the IRS.
Form 1095-C:
This form is used to report information about each employee to the IRS and the employer. It is also used in determining whether or not the employee is eligible for the premium tax credit.
Common Mistakes Made When Filing with the IRS
- Outdated or nonexistent ACA processes due to inadequate tracking of hours.
- Not knowing who a full-time employee is.
- Poor handling of employment breaks, leaves of absence, new hires, termination, and position changes.
- Inaccurate reporting including, coding errors, “over-reporting”, and choosing the wrong safe harbor.
- Lack of documentation.
