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Businesses Surprised to Receive ACA Penalties by Adam Cohen, CPA

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Posted on October 26, 2020 by Adam Cohen

The Affordable Care Act (ACA), signed into law in 2010 and effective for tax years beginning in 2014, continues to be a source of political and legal contention. Today, amid the COVID-19 pandemic and resulting business closures and job losses, Republican lawmakers and business owners in 20 states prepare to argue before the Supreme Court against the constitutionality of the ACA’s individual mandate. At the same time, the IRS has been ramping up its compliance efforts, issuing penalties to businesses that knowingly or unknowingly did not comply with the law’s employer mandate.

The ACA introduced an employer mandate requiring applicable large employers (ALEs) to offer affordable, minimum-value health insurance to 95 percent of its full-time equivalent employees (FTEs) and their eligible dependents. The law defines ALEs as businesses averaging 50 or more full-time equivalent employees (FTEs) who work a minimum of 30 hours per week.

Employers that fail to offer minimum essential coverage to 95 percent of its FTEs (and their dependents) risk an employer shared-responsibility penalty of $2,570 (in 2020) for every non-covered employee after the first 30.

When coverage is offered but it is neither affordable (i.e. the employee’s contribution is more than 9.78 percent of his or her annual household income in 2020 or one of the three available safe harbors) nor of minimum value (i.e. the plan pays for less than 60 percent of covered costs), the employer’s penalty increases to $3,860 (in 2020) for each FTE that purchases health insurance through the federal marketplace and receives a premium tax credit.

Today, as the financial impact of the coronavirus health crisis continues to reverberate through the economy, employers that furloughed workers, reduced their work hours or made permanent layoffs are now operating in a new business environment. Although changes to a company’s workforce can have a significant impact on its exposure to penalties under the ACA’s employer mandate, it is important taxpayers recognize that recent legislation enacted to provide financial relief in the wake of the COVID-19 pandemic does not materially change the rules they must follow to avoid those ACA-related penalties. Following are answers to two of the most common questions we have been helping clients work through.

Must I provide health coverage to my workforce if I now have fewer employees working fewer hours? 

For purposes of determining a business’s status as an ALE subject to the employer mandate in a particular year, the IRS looks at the size of the company’s workforces in the preceding calendar year. For example, a company that had 50 or more full-time-equivalent employees averaging 130 hours of work per month in 2019 would be required to offer health insurance to 95 percent of its FTEs in 2020 even if it reduced its workforce to 25 FTEs in 2020. In this example, the business may avoid an employer shared-responsibility penalty, provided it offered health insurance to 23.75 of its 25 workers.

Next, the business must determine which workers qualify as FTEs averaging at least 30 hours of service per week, or 130 hours per month. To do this, many businesses have opted to use a simplified look-back method that requires them to review employees’ “actual hours of service” during a prior, pre-determined period of between three and 12 months, and applying that measurement to a future period of equal length. Therefore, based on the look-back measurement method, employers’ FTEs for 2020 were already established before COVID-19 reached the U.S.

It is important for businesses to recognize that the law defines hours of service as those in which an employee was “paid or entitled to payment for the performance of duties for the employer or for a period of time during which no duties are performed due to vacation, holiday, illness, incapacity (including disability), layoff, jury duty, military duty or leave of absence.” Consequently, employers must continue to maintain health insurance for those employees whose actual work hours declined in 2020, even when the reduction was significant and regardless of whether that decline was due to a business’s reduced operating hours or an employee’s furlough or expanded coverage under the Family Medical Leave Act.

Must I continue to offer required health coverage to furloughed employees and workers who took unpaid leave? 

The short answer is, yes! Based on the look-back method for measuring employees’ full-time status, applicable large employers subject to the ACA’s employer mandate in 2020 must continue to offer health benefits to employees whose hours of service fall below the 30 hour-per-week minimum threshold. As a result, businesses that suspended insurance benefits for furloughed workers or employees whose hours they temporality reduced during the pandemic are in danger of ACA employer-shared responsibility penalties. The same holds true for employers that may have extended COBRA health benefits to its FTE employees.

About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency while complying with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.