According to recent surveys, American employers are still confused as to how they will be affected if they decide to bypass the required law of offering health coverage to their employees. Here at MBL, we want to help each of our current and prospective clients understand which category they fall into and the penalty they would have to pay.

There are two employer penalties:

1)    “No Coverage” Penalty a/k/a “Pay or Play” Penalty.

2)    “Unaffordable Coverage” Penalty a/k/a “Free Rider” Penalty

An employer is penalized ONLY if they are considered to be a large employer – more than fifty full-time employees (FT = 30 hours or more weekly).  Part-timers are deemed to be full-time employees if they work at least 120 hours per month. In this first instance, if an employer is defined as a “large” employer and does not offer health insurance, they must pay the “No Coverage” Penalty, which is NOT tax deductible.

The second penalty comes takes place if an employer is defined as a large employer AND at least one employee has a household income that is below 400% of the federal poverty level (In 2013 . . . $11,490 x 400%, or $45,960 for a single), AND receives a Premium Credit, that is, a subsidy to buy health insurance from a state exchange. The employer in this case is required to pay the “Unaffordable Coverage” Penalty. Employers must also pay this penalty if insurance offered has insufficient coverage. Again, this penalty is NOT tax deductible to the employer.

Calculations for each of the two penalties are as follows:

1)    “No Coverage” Penalty—Computation
Monthly penalty = 1/12 of $2000 times, the total number of full-time employees that month minus 30.

X = Monthly Penalty
Y = Total number of full-time employees that month

X = $2000 (Y-30) / 12

2)     “Unaffordable Coverage” Penalty—Computation
Monthly penalty = the lesser of the following two calculations)

a)    The  “No coverage penalty”
X = Monthly Penalty
Y = Total number of full-time employees that month


b)    1/12 of $3,000 times the total number of full-time employees receiving the assistance.
X = Monthly Penalty
Y = Total number of full-time employees receiving assistance

  1. a.    [X = $2,000 (Y-30) / 12]   OR   b.   [X = $3,000 (Y) / 12]                             Whichever is LESS            

Question: How does an employer know an employee’s “Household Income”?

The IRS provides a “safe harbor”. The employer can treat the employee’s income reported in Box 1 of their W-2 as his or her household income. Otherwise, the employer would need to obtain other information from the employee to determine household income.

Download an easy to read flow chart regarding employer penalties here:

Read More:
Bringing You Up to Speed on Healthcare Reform




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