Can Dependents Trigger a §4980H(a) Penalty or §4980H(b) Penalty?

Can Dependents Trigger a §4980H(a) Penalty or §4980H(b) Penalty?

By:  Ryan Moulder

Beginning on January 1, 2015 employers will need to be cognizant of who can trigger the penalties under Internal Revenue Code (IRC) §4980H. This analysis involves several steps such as classifying employees properly, documenting to whom an offer of coverage was made, and correctly applying the 95 percent rule. These topics have been written about frequently and most employers are aware of the basics surrounding these issues. However, one underlying issue that has received less attention is whether a dependent can trigger the §4980H penalties.

Before discussing the §4980H penalties and how they function, it is helpful to understand the rules related to premium tax credit eligibility to understand why the question of who can trigger the §4980H penalties is relevant. An individual or family is only eligible for a premium tax credit if the individual is, among other things, not eligible for minimum essential coverage under an eligible employer-sponsored plan that provides minimum value and is affordable.

A plan provides minimum value if the plan’s share of the total allowed costs of benefits provided under the plan are greater than or equal to 60 percent of the plan’s cost. Most employers are offering at least one plan that provides minimum value.

There are two rules associated with affordability when determining eligibility for premium tax credits.  First, an employer’s coverage for an employee is considered affordable if the cost of the employee’s share of premiums for self-only coverage does not exceed 9.56 percent (note this is a separate test from the affordability safe harbors which are still tested using 9.5 percent) of the employee’s household income (see §1.36B-2(c)(3)(v)(A)(1), §1.36B-2(c)(3)(v)(C), and Rev. Proc. 2014-37).  For related individuals, a term that encompasses dependents if covered by the plan, an employer’s coverage for the related individuals of an employee is considered affordable if the cost of the employee’s share of premiums for self-only coverage does not exceed 9.56 percent of the employee’s household income (see §1.36B-2(c)(3)(v)(A)(2)).  The affordability of the related individuals’ health coverage is tied to the cost of the employee’s self-only coverage, not the cost of the related individuals’ health coverage.

Using the two affordability rules associated with premium tax credit eligibility, an “affordable” offer of a plan providing minimum value will make both the employee and any of the employee’s dependents who are eligible for the plan ineligible for premium tax credits so long as the employee is taking a §151 deduction for the dependent. This is a harsh rule for dependents.

A strategy many employers are utilizing is offering the self-only coverage at a cost of 9.5 percent to the employee (or a cost slightly lower). However, many employers are charging the employee the full price for family coverage (coverage that includes dependents) which can easily exceed $1,000 per month. This strategy is prevalent because it is the bare minimum the ACA requires. Therefore, it is not surprising employers operating in industries with low profit margins who have not previously offered coverage are utilizing the most cost-effective solution.

Still many employers are troubled by the fact they are not only making their employees ineligible for premium tax credits, but also a large number of dependents ineligible for premium tax credits. This is why the question of the publication is so important. If dependents are not offered coverage by the employer, they could still be eligible for premium tax credits so long as other conditions are satisfied. The question is what consequences are associated with not offering a full-time employee’s dependents coverage?

The starting place for any analysis always begins with the law itself. The §4980H(a) penalty can be broken into three parts. The first part of the penalty is discussed in §4980H(a)(1) and requires an applicable large employer (ALE) to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan or risk paying a penalty. If an ALE does not offer minimum essential coverage, the §4980H(a) penalty could be triggered. The second part of the penalty, the trigger mechanism, which is conjunctive with the first part of the penalty, conditions the penalty on at least one full-time employee of the ALE being certified to the employer under §1411 of the Patient Protection and Affordable Care Act as receiving a premium tax credit (see §4980H(a)(2)). Notice the condition for triggering the §4980H(a) penalty is limited to full-time employees which is different than the first part of the penalty which requires coverage to be offered to full-time employees (and their dependents). This is certainly an odd discrepancy, but it would not be the first time an ACA requirement came without an attached penalty (remember the FLSA §18B notices). The third part of the penalty which is immaterial to the question of this publication, the calculation of the penalty, is discussed in the flush language to §4980H(a), §4980H(c)(1) and §4980H(c)(1)(D)(i)(I).

The §4980H(b) penalty is structured in a similar manner. The first part of the penalty is discussed in §4980H(b)(1)(A) and requires an ALE to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan. If minimum essential coverage is not offered, the penalty would be evaluated under §4980H(a) as discussed in the paragraph above. The second part of the penalty, the trigger mechanism, which is conjunctive with the first part of the §4980H(b) penalty, conditions the penalty on at least one full-time employee of the ALE being certified to the employer under §1411 of the Patient Protection and Affordable Care Act as receiving a premium tax credit (see §4980H(b)(1)(B)). Again, notice the condition for triggering the §4980H(b) penalty is limited to full-time employees which is different than the first part of the penalty which requires coverage to be offered to full-time employees (and their dependents). The third part of the penalty which is immaterial to the question of this publication, the calculation of the penalty, is discussed in the flush language to §4980H(b)(1), §4980H(b)(2) and §4980H(c)(1)(D)(i)(II).

Consistent with the language in §4980H(a) and §4980H(b), the final regulations condition the penalties on an ALE member receiving a §1411 Certification with respect to at least one full-time employee (see §54.4980H-4(a) and §54.4980H-5(a)). Therefore, according to the plain language in the IRC and the final regulations, it is safe to assume that dependents can never trigger a §4980H penalty. However, dependent coverage should still be offered to a full-time employee’s dependents as a result of the 95 percent rule.

The 95 percent rule is set out in the last two sentences of §54.4980H-4(a). According to the rule an ALE is treated as offering minimum essential coverage to its full-time employees (and their dependents) “for a calendar month if, for that month, it offers such coverage to all but five percent (or, if greater, five) of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also offers coverage to that employee’s dependents (emphasis added)).” The final regulations make it clear to utilize the 95 percent rule, a full-time employee’s dependents must be offered coverage along with the full-time employee. Therefore, an employer not offering a full-time employee’s dependents coverage would not have the protection of the 95 percent rule.

While it is true dependents can never trigger the penalties under §4980H, employers exploring this strategy are strongly discouraged from taking this course of action by the language in the 95 percent rule. It is almost inevitable employers will not offer coverage in a timely fashion to certain full-time employees over the years. This is why the 95 percent rule was added in the final regulations. Without it, one full-time employee who is not offered coverage in a timely manner could trigger the §4980H(a) penalty costing the employer thousands, if not millions, of dollars. For this reason, employers have no realistic alternative but to offer a full-time employee’s dependents coverage.


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