During 2015, employers with an aggregate number of full-time and full-time equivalent employees between 50 and 99 have enjoyed a reprieve from the Patient
Protection and Affordable Care Act (“ACA”) Employer Mandate. Although these employers qualify as Applicable Large Employers (“ALE’s”) under the ACA – and therefore must offer their full-time employees affordable, minimum value health insurance coverage or pay a penalty – the Government promised not to impose such penalties if ALE’s with less than 100 full-time and full-time equivalent employees (“Small ALE’s”) did not comply with the Employer Mandate during 2015. However, beginning on January 1, 2016, Small ALE’s must comply with the Employer Mandate or be subject to potentially significant monetary penalties.
As the January 1, 2016 deadline looms, many Small ALE’s are struggling to analyze and select what they consider to be the lesser of two evils: (1) bear the likely onerous costs of offering affordable health insurance coverage (that is, the employee’s share of employee-only premium cannot exceed 9.5% of the employee’s income) to at least 95% of their full-time employees and their dependents; or (2) pay a potentially significant tax penalty. In addition, even if these employers offer coverage, it may be difficult for the employer to offer affordable coverage to its lower-income employees.
Over the past several years, many ALE’s have assumed that the “Sledgehammer Penalty” – that is, the penalty for not offering coverage to at least 95% of their full-time employees and one of those employees obtains a premium tax credit – is $2,000 per year ($167 per month) per full-time employee (less 30 employees beginning in 2016). Likewise, ALE’s have assumed that the “Tackhammer Penalty” – the penalty if an ALE offers coverage to at least 95% of its full-time employees but fails to offer coverage to at least one full-time employee who obtains a premium tax credit – is $3,000 per year ($250 per month) for each such employee. However, ALE’s must be aware that beginning in 2015, those amounts have increased and likely will continue to increase annually.
Under the original ACA statute, the Employer Mandate penalties are subject to an “inflation adjustment” beginning in 2015. This adjustment is equal to the “Premium Adjustment Percentage” defined in other parts of the ACA for other purposes, such as the maximum limitation on cost-sharing. The Premium Adjustment Percentage is defined as the difference between the average per capita premium for health insurance coverage for the preceding calendar year and the average per capita premium for 2013. On February 27, 2015, the U.S. Department of Health and Human Services issued its final Notice of Benefit and Payment Parameters for 2016, which included its calculation of the Premium Adjustment Percentage. In this final rule, the Premium Adjustment Percentage for 2016 was established at 8.3%.
Therefore, at this point it appears that the actual Sledgehammer Penalty that will be assessed against ALE’s for failing to offer coverage to at least 95% of full-time employees during 2016 is not $2,000 per year per full-time employee, but $2,160.
- For a Small ALE with 92 full-time employees, the tax penalty will be calculated based on 62 employees. At $2,000 per employee, the penalty would be $124,000; however, when adjusted for inflation, the total penalty increases by almost $10,000 to $134,000.
- For a larger ALE with 430 full-time employees, the penalty at $2,000 would be $800,000; however, when adjusted for inflation, the total penalty increases by over $64,000, to $864,000.
Likewise, even if an ALE offers coverage to at least 95% of its full-time employees but fails to make an offer to one full-time employee who receives a premium tax credit, the annualized penalty for that employee in 2016 will be $3,240, not $3,000.
Because the Premium Adjustment Percentage index calculation – which is premised on the average per capita health insurance premium cost each year – is the result of a complex set of factors, it is difficult to predict over the long term what the actual Employer Mandate tax penalty amount will be each year. For employers who are weighing whether to “pay or play,” or who have decided to incur the tax penalties as a long-term strategy, this annual penalty adjustment adds another level of uncertainty for employers attempting to navigate through the ACA.
 80 Fed. Reg. 10750, 10825 (Feb. 27, 2015) (http://www.gpo.gov/fdsys/pkg/FR-2015-02-27/pdf/2015-03751.pdf). In its published Fact Sheet, USDHHS explained that it calculated the premium adjustment percentage for the two-year period between 2013 and 2015, which included both the estimated 4.3% premium increase between 2013 and 2014, as well as a further 3.9% estimated premium increase between 2014 and 2015. https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2015-Fact-sheets-items/2015-02-20.html.