Yesterday, the IRS announced the 2024 employer mandate penalties (opens a new window) applicable to employers with 50 or more full-time equivalent employees (ALEs) under the Affordable Care Act (ACA). For the calendar year 2024, the A Penalty (IRC Section 4980H(a)) is $2,970 (which represents a $90 increase from 2023) and the B Penalty (IRC Section 4980H(b)) is $4,460 (which represents a $140 increase from 2023).
Lockton comment: The employer mandate penalties are calculated monthly. Therefore, the monthly penalty is equal to the annual penalty amount noted above, divided by 12.
Background
Under the ACA, employers that are ALEs may be subject to an employer mandate penalty for (1) failing to offer minimum essential coverage to 95% of full-time employees and their dependents (the A Penalty) or (2) offering coverage that is not affordable or does not provide minimum value (the B Penalty). The penalties are only triggered if a full-time employee purchases coverage through the Marketplace and receives subsidized coverage via premium tax credit.
Lockton comment: Only full-time employees (not full-time equivalent employees) count when calculating penalties. Employers are reminded that the IRS uses Form 1095-C information when determining whether penalties are assessable, so it is important to ensure Form 1095-C is accurate and any errors discovered are promptly corrected. An employer receiving a Letter 226-J from the IRS stating that the employer may be liable for employer mandate penalties should take prompt action to respond. Your Lockton team can assist in reviewing Letter 226-J.
The A Penalty
For the calendar year 2024, an employer will be subject to the A Penalty of $2,970 per ACA full-time employee minus the first 30 employees if the employer fails to offer minimum essential coverage to 95% of its full-time employees and their dependents and any full-time employee purchases subsidized coverage through the Marketplace.
Lockton comment: While employers are given a buffer for the A Penalty (an employer can fail to offer 5% and the penalty is not assessed for the first 30 employees), the penalty’s nickname, the “sledgehammer” penalty, is well-earned since the penalty applies to all of the employer’s full-time employees in the EIN if triggered.
The B Penalty
If an employer fails to offer coverage that is affordable and provides minimum value, a full-time employee receiving subsidized coverage through the Marketplace will trigger the B Penalty. Unlike Part A, however, the Part B penalty ($4,460 divided by 12 months) is only imposed with respect to each full-time employee receiving subsidized coverage through the Marketplace for the month. Moreover, the B Penalty is limited to the monthly penalty that would apply if the employer failed the A penalty.
Generally, the coverage provides minimum value if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of those costs. Coverage is considered affordable for an employee if the employee’s required contribution for self-only does not exceed a specified affordability percentage (set annually by the IRS) of the employee’s household income. As a reminder, since employers generally do not know an employee’s household income, the IRS allows employers to determine affordability using one of three affordability safe harbors (W-2, rate of pay, and federal poverty level).
Lockton Comment: For 2023, the IRS set the affordability percentage at 9.12% (this was a significant decrease from 9.61% in 2022). The IRS has not set the affordability percentage for 2024. Lockton will communicate when the 2024 affordability percentage is announced.
The IRS is actively issuing 226-J letters to employers informing them that they may be liable for employer mandate penalties. Care should be taken to ensure full-time employees are properly identified and offered coverage and that required employee contributions for self-only coverage are affordable under one of the three allowable safe harbors. Even still, errors on Form 1095-C can result in a Letter 226-J. Please contact your Lockton Account Team if you have any questions about the employer mandate penalties or receive a Letter 226-J.
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