United States

Will your health plan trigger IRS penalties?


Due to the Affordable Care Act (ACA), large employers that fail to offer employee health insurance that meets ACA standards may be assessed a shared responsibility payment by the IRS. A company is a large employer if it averaged at least 50 full-time employees (including full-time equivalents) during the preceding calendar year.

In order to avoid this “pay or play” penalty, a large employer must offer employee health coverage that meets three ACA requirements:

  • Minimum essential coverage
  • Minimum value
  • Affordability

To meet the minimum essential coverage requirement, an employer must offer health coverage to at least 95 percent of its full-time employees and their dependents. If a large employer fails to meet this requirement in 2016, it could be assessed a penalty of $2,160 for each full-time worker employed during 2016. 

The minimum value standard requires the health plan to cover a certain percentage of all medical expenses incurred by employees. The affordability standard will be met if employees are paying less than 9.66 percent of their wages for self-only coverage. A health plan that does not meet the minimum value or affordability standards can trigger an employer penalty of $3,240 for each employee who declines the employer’s coverage and enrolls in health insurance through the Health Insurance Marketplace (also known as the exchange).

Since 2015 was the first year employers needed to comply with these ACA standards, several transition rules applied that cannot be relied on for 2016 and future years. Therefore, employers should review their health plans to ensure they are in compliance with the 2016 rules.

To determine which employers owe the penalty, the IRS is requiring large employers to file Forms 1095-C and 1094-C to report workforce and health plan information for 2015 and future years. The deadline for filing the 2015 forms was June 30, 2016. Over the next few months, the IRS will be processing the 2015 forms and mailing penalty notices to employers that they believe owe a shared responsibility payment. Employers will have an opportunity to respond to the notices before a demand for payment is made. Consequently, you should review any penalty notices carefully and respond promptly regarding any disagreement with the IRS’s assessment.

For more details about employer shared responsibility payments, please review our article, Employers face new penalties on health plans under the Affordable Care Act.

Jill Harris

Senior Director

Jill helps businesses with planning and compliance for employee welfare and retirement plans. She can be reached at jill.harris@rsmus.com.

Areas of focus: Washington National TaxAffordable Care Act