With the end of CY 2015 and the start of wage reporting, many employers are making preliminary determinations about potential liability for penalties under the section 4980H Employer Shared Responsibility (ESR) provisions of the Affordable Care Act.

To be sure, IRS extension of the due dates for Form 1095-C health coverage information reporting—the Service’s main enforcement mechanism for the ESR mandate—will delay notice of such penalties until late 2016. Still, applicable large employers will give priority to managing compliance with the “Play or Pay” mandate and to recognizing the pivotal role of Premium Tax Credits in penalty determination.  

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ACA Employer Shared Responsibility Compliance: What Employers Need to Know About Premium Tax Credits

Tue Jan 26, 2016

With the end of CY 2015 and the start of wage reporting, many employers are making preliminary determinations about potential liability for penalties under the section 4980H Employer Shared Responsibility (ESR) provisions of the Affordable Care Act.

To be sure, IRS extension of the due dates for Form 1095-C health coverage information reporting—the Service’s main enforcement mechanism for the ESR mandate—will delay notice of such penalties until late 2016. Still, applicable large employers will give priority to managing compliance with the “Play or Pay” mandate and to recognizing the pivotal role of Premium Tax Credits in penalty determination.

Employers generally understand that possible penalty exposure requires not only that an employer fails to offer “affordable” health coverage that provides “minimum value” but that a full-time employee receives a government Premium Tax Credit (PTC) subsidy to help pay premiums for exchange-based coverage.

Put simply, if a full-time employee is not entitled to a PTC his or her employer generally will not be subject to an ESR penalty—regardless of the coverage the employer offers or does not offer.

The Internal Revenue Service offers guidance on Premium Tax Credit eligibility in Publication 974, dated March 2015, that is helpful to both employees and employers.

Applicants for PTC subsidies are advised that they “generally cannot take the PTC for an individual in your tax family for any month that the individual is eligible for minimum essential coverage,” which includes coverage under employer-sponsored plans.

IRS continues, “You are eligible for an employer-sponsored plan (and cannot get the PTC) only if the coverage is affordable to the employee and the coverage provides minimum value.”

And significantly, “If you or your family member enrolls in the employer coverage, the individual enrolled cannot get the PTC for coverage…, even if the employer coverage is not affordable or does not provide minimum value.”

Finally, “if you can enroll in employer coverage that is affordable and provides minimum value…and you do not enroll, you cannot get the PTC for your coverage….”

From the perspective of compliance with the Employer Shared Responsibility provisions of the Affordable Care Act, IRS Publication 974 makes clear to employees and employers that individuals will not be entitled to PTC subsidies, and their employers will generally not be subject to Play or Pay mandate penalties, under at least three scenarios:

Number OneAn employer offers mandate-compliant health coverage that is both affordable to the employee and provides minimum value and the employee enrolls in such coverage;

Number TwoAn employer offers health coverage that is either not affordable or does not provide minimum value, or both, and the employee nevertheless enrolls in such coverage;

Number ThreeAn employer offers mandate-compliant health coverage that is both affordable to the employee and provides minimum value and the employee elects not to enroll in such coverage.

The burden will be on the IRS, after the due date for employers to file their Form 1095-C health coverage information returns (now extended until June 30), to “ensure employers receive certification that one or more employees have received a premium tax credit” and to inform employers of potential liability for an Employer Shared Responsibility payment.

In any event, as applicable large employers review 2015 compliance with the Play or Pay mandate and evaluate potential exposure to ESR penalties, they need to recognize that individual eligibility for a Premium Tax Credit can be the real penalty trigger.

NOTE: This blog is for educational and information purposes only. It is not intended to provide legal or tax advice.