QUESTION: We are an employer subject to Code § 4980H. In order to avoid employer shared responsibility penalties, what health coverage must we offer to our employees?
ANSWER: There are two types of penalties under the employer shared responsibility provisions of Code § 4980H. What health coverage must be offered depends on the type of penalty the IRS assesses. Note that the IRS can only assess each penalty if a full-time employee purchases coverage on the Exchange and receives premium tax credits. Only an applicable large employer (ALE) may be subject to penalties. An ALE is generally an employer that employed 50 or more full-time employees, including full-time equivalents, during the prior calendar year.
Under Code § 4980H(a), an ALE may be subject to a monthly penalty for failure to offer enough (generally, at least 95%) of its full-time employees and their dependents the opportunity to enroll in minimum essential coverage (MEC). MEC includes most employer-sponsored group health coverage, but not excepted benefits, such as limited-scope dental and vision benefits. The Code § 4980H(a) penalty is assessed based on the number of full-time employees for the month—including those that received a MEC offer.
Under Code § 4980H(b), an ALE may be subject to a monthly penalty if it offers MEC to the required number of full-time employees (and their dependents) but the coverage offered to full-time employees does not provide “minimum value” or is not “affordable.” (This penalty is assessed only with respect to full-time employees who actually receive a premium tax credit, so the ALE’s potential exposure is much less under the Code § 4980H(b) penalty.) A plan provides minimum value if its share of the cost of benefits is at least 60% and provides substantial coverage of inpatient hospital services and physician services. An employee is eligible to receive a premium tax credit if the employer-sponsored coverage is unaffordable and the employee cost-share for self-only coverage exceeds 9.5% (indexed) of the employee’s household income for the taxable year. (Optional safe harbors (W-2, rate of pay, and federal poverty line) may be used instead of household income to determine affordability.)
Notably, for purposes of a potential penalty under Code § 4980H(b), the offer of minimum value, affordable coverage is required to be made only to eligible full-time employees. Dependents need only be offered an opportunity to enroll in MEC for purposes of avoiding both Code §§ 4980H(a) and 4980H(b) penalties, and such coverage does not have to provide minimum value or be affordable. For this purpose, “dependents” means an employee’s children, as defined in Code § 152(f)(1), who are under 26 years of age (but does not include stepchildren or foster children). An ALE is not required to offer any coverage to an employee’s spouse in order to avoid Code § 4980H penalties.
For more information, see EBIA’s Health Care Reform manual at Sections XXVIII.D (“Assessable Payment (Penalty Tax) When Coverage Not Offered to Enough Full-Time Employees and Dependents (the ‘Subsection (a) Penalty’)”), XXVIII.E (“Assessable Payment (Penalty Tax) When Inadequate Coverage Offered to Full-Time Employees and Dependents (the ‘Subsection (b) Penalty’)”), and XXXIII.F (“Dependent Children Eligibility Mistakes”).
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