Individual Tax Credits to Trigger Employer Penalties

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The Affordable Care Act (ACA) created a premium tax credit to help eligible individuals and families purchase health insurance through an Affordable Insurance Exchange (Exchange). By reducing a taxpayer’s out-of-pocket premium costs, the credit is designed to make coverage through an Exchange more affordable. The Exchanges are scheduled to become operational in 2014, with enrollment beginning Oct. 1, 2013.

On May 23, 2012, the Internal Revenue Service (IRS) published final regulations to provide guidance on various aspects of the premium tax credit, including the eligibility criteria for claiming the tax credit. Comments on the regulations will be accepted until Aug. 21, 2012.

Even though the credit is only available to individuals, the IRS’ guidance is significant for large employers. For this purpose, a “large employer” is one with an average of 50 or more full-time equivalent employees. If a large employer’s health coverage does not meet ACA’s minimum essential coverage requirements and a full-time employee receives a premium tax credit under an Exchange, the employer may be subject to ACA’s shared responsibility penalty beginning in 2014.

For 2014, ACA’s monthly shared responsibility penalty for large employers whose coverage is not considered minimum essential coverage is equal to 1/12 of $3,000 ($250) for each full-time employee who receives a premium tax credit. However, the total monthly penalty for an employer would be limited to the total number of the company’s full-time employees (minus 30), multiplied by 1/12 of $2,000.

A separate penalty applies to large employers not offering health coverage. For 2014, ACA’s monthly penalty for these employers is equal to the number of full-time employees (minus 30), multiplied by 1/12 of $2,000 ($166.67).

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