Does the §4980H(a) Penalty Really Cap the §4980H(b) Penalty?

Does the §4980H(a) Penalty Really Cap the §4980H(b) Penalty?

By:  Ryan Moulder

Several times a day, I cringe reading articles about the Affordable Care Act (ACA) that oversimplify the law to the point where statements being made are incorrect. I understand the issues writing about the ACA presents. Use too much detail and the article gets long, jargon-filled and almost impossible to follow. However, use too little detail and the article becomes inaccurate. It’s a delicate balancing act that challenges every ACA author. This brings me to the question this publication explores: Does §4980H(a) really cap §4980H(b) as so many have claimed?

This statement has been publicized thousands of times, but the statement is not accurate in light of the limited non-assessment periods. The starting point for the analysis begins with the actual text of the Internal Revenue Code (IRC) provision. IRC §4980H(b)(2) limits the §4980H(b) penalty by capping the amount at the product of the applicable dollar amount, $167, ($167 = $2,000 * (1/12)) and the number of full-time employees for the month. IRC §4980H(c)(2)(D)(i)(II) further explains the number of full-time employees used to cap the §4980H(b) penalty is reduced by the employer’s share of the 30 employee reduction. Using the IRC language the equation for capping the §4980H(b) penalty for a single employer in a month is:

4980H(b) penalty ≤ $2,000 * (1/12) * (# of full-time employees – 30)

The final regulations provide the exact same equation to cap the §4980H(b) penalty (see §54.4980H-5(a)). However, the final regulations amended the calculation of the §4980H(a) and §4980H(b) penalties compared to both the text of the IRC and the proposed regulations.

The §4980H(a) penalty is determined by calculating the number of full-time employees minus any employees in a limited non-assessment period minus the employer’s share of the 30 employee reduction. The product of the number in the preceding sentence and $167 ($2,000 * (1/12)) gives an employer its monthly §4980H(a) penalty.

4980H(a) = $167 * (# of full-time employees – employees in a limited non-assessment period – 30)

The §4980H(b) penalty is determined by calculating the number of full-time employees receiving a premium tax credit (who were not offered minimum essential coverage by the employer that provided minimum value and satisfied one of the affordability safe harbors) minus any employees in a limited non-assessment period. The product of the number in the preceding sentence and $250 ($3,000 * (1/12)) gives an employer its monthly §4980H(b) penalty.

4980H(b) = $250 * (# of full-time employees receiving a premium tax credit – employees in a limited non-assessment period)

However, as discussed in the first equation above, in no circumstance may the §4980H(b) monthly penalty exceed the product of $167 ($2,000 * (1/12)) and the number of full-time employees minus the employer’s share of the 30 employee reduction (see §54.4980H-5(a)).

The §4980H(b) cap retained the original equation, while both the §4980H(a) and §4980H(b) changed to subtract out employees in a limited non-assessment period. Importantly, an employee may be in a limited non-assessment period for the §4980H(a) penalty, but the same employee may not be in a limited non-assessment period for the §4980H(b) penalty. This is why it is no longer accurate to say the §4980H(a) penalty always caps the §4980H(b) penalty.

Examining one of the six limited non-assessment periods will help illustrate the point. Section 54.4980H-2(b)(5) provides a limited non-assessment period that allows an employer to exclude a full-time employee from the penalty calculation who was not offered coverage at any point during the prior calendar year so long as coverage is offered to the employee by April 1. The provision is intended to allow an employer who learns it is an applicable large employer (ALE) for the first time late in the calendar year to have three calendar months, January, February, and March, to select a plan to cover its full-time employees who were not offered insurance in the previous calendar year. This limited non-assessment period is only available the first year the employer becomes an ALE.

If the employer offers coverage that provides minimum value to an employee by April 1 who was not offered coverage by the employer at any point during the prior calendar year, the employee will not count when calculating the potential penalty for §4980H(a) or §4980H(b) in January, February, or March. However, if the employer offers coverage that does not provide minimum value (such as solely offering a skinny plan) to an employee by April 1 who was not offered coverage by the employer at any point during the prior calendar year, the employee would count when calculating the §4980H(b) penalty, but not when calculating the §4980H(a) penalty in January, February, or March.

Think of this scenario. ABC Inc. has had fewer than 50 employees throughout its history and has never offered any employee any form of health care coverage. In 2016 ABC experiences great success and rapidly grows to 200 full-time employees. As a result, ABC will first be an ALE in 2017 (remember an employer’s ALE status uses the preceding years hours of service).

Suppose ABC plans on offering coverage that begins April 1, 2017. ABC could possibly be eligible to use the limited non-assessment period discussed above for the calendar months of January, February, and March of 2017. If ABC’s coverage provides minimum value by April 1, 2017, ABC will not be responsible for a §4980H(a) penalty or a §4980H(b) penalty for the months of January, February, and March because of the limited non-assessment period. However, if ABC’s coverage does not provide minimum value, ABC could potentially be liable for a penalty under §4980H(b). Below explains how the three calculations, the §4980H(a) penalty, the §4980H(b) penalty, and the §4980H(b) cap, would interact.

If ABC’s plan provides minimum value the monthly penalty under §4980H(a) would be:

4980H(a) = $2,000 * (1/12) * (# of full-time employees – employees in a limited non-assessment period – 30)

4980H(a) = $2,000 * (1/12) * (200 – 200 – 30)

4980H(a) = $0 (sorry the IRS is not going to give you money)

Similarly, the §4980H(b) penalty would be $0 if ABC’s offer of coverage provides minimum value even if each of ABC’s employees received premium tax credits in January, February, and March of 2017.

4980H(b) = $3,000 * (1/12) * (# of full-time employees receiving a premium tax credit – employees in a limited non-assessment period – 30)

4980H(b) = $3,000 * (1/12) * (200 – 200)

4980H(b) = $0

However, the cap on the §4980H(b) penalty would not be the §4980H(a) amount but would instead be the following calculation:

4980H(b) penalty ≤ $2,000 * (1/12) * (# of full-time employees – 30)

4980H(b) penalty ≤ $2,000 * (1/12) * (200 – 30)

4980H(b) penalty ≤ $28,333 (monthly)

If ABC’s plan does not provide minimum value, the §4980H(a) penalty and the §4980H(b) cap would remain the same at $0 (monthly) and $28,333 (monthly) respectively. However, the limited non-assessment period would not be available when calculating the §4980H(b) potential penalty. If each of ABC’s employees received premium tax credits in January, February, and March of 2017, ABC could be exposed to a significant monthly §4980H(b) penalty.

4980H(b) = $3,000 * (1/12) * (# of full-time employees receiving a premium tax credit – employees in a limited non-assessment period)

4980H(b) = $3,000 * (1/12) * (200 – 0)

4980H(b) = $50,000 (monthly)

In this example the §50,000 monthly penalty exceeds the §4980H(b) cap of $28,333. Therefore, the most ABC could pay for a §4980H(b) penalty in any month is $28,333. However, this number is more than the §4980H(a) amount of $0. As a result of the limited non-assessment period, it is no longer accurate to say the cap on the §4980H(b) penalty is always the §4980H(a) amount.

Other than the inaccuracy of the frequent statement there are a few other important takeaways. First, the discrepancy in the §4980H(a) penalty and the §4980H(b) penalty is also created in four of the five other non-assessment periods (see §54.4980H-3(c)(2); §54.4980H-3(d)(2)(iii); §54.4980H-3(d)(3)(iii); and §54.4980H-3(d)(3)(vii)). Additionally, it should be noted that just the minimum value requirement can trigger the discrepancy and not the affordability requirement. There is a potential planning opportunity as a result. In certain instances a minimum value plan offered at full-cost to the employee (i.e. the employee pays all of the premiums) could completely alleviate the costs of employees in a limited non-assessment period.

Second, offering skinny plans alone is almost never a good option for an employer. I have still not seen a scenario where a skinny plan alone is an employer’s best option and this is magnified as a result of the limited non-assessment periods.

Third, the limited non-assessment period can have a significant impact on both the §4980H(a) penalty and the §4980H(b) penalty. If you are an employer who plans on utilizing one of the limited non-assessment periods, careful planning should be taken to ensure that penalties can be avoided.

Finally, the new statement should be §4980H(a) caps the §4980H(b) penalty so long as one plan that is being offered provides minimum value. Careful what you read, there is a lot of bad ACA information.


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