Here’s a Health Reform Question About Employer Penalty Tax and the 95% Rule

Question – After 2013, an employer offers affordable minimum essential coverage to at least 95%, but less than 100%, of full-time employees. Will the employer owe any penalty tax if an employee, who was not offered coverage, receives a premium tax credit, or cost-sharing reduction, on the Exchange?

Answer – Yes

The penalty tax under Code Section 4980H(b) may apply if any full-time employee not offered coverage goes on the Exchange and receives a premium credit or cost-sharing reduction. Under the “margin of error” rule, the penalty tax under Code Section 4980H(a) will not apply in this instance.

In Proposed Treasury Regulation Section 54.4980H-4(a), the IRS provides this margin of error rule that an applicable large-employer member will be treated as offering coverage to its full-time employees (and their dependents) for a calendar month if, for that month, it offers coverage to all but 5%, or, if greater, 5 of its full-time employees (provided that an employee is treated as having been offered coverage only if the employer also has offered coverage to that employee’s dependents).

This “margin of error” rule only prevents the application of the penalty tax under Code Section 4980H(a), but not the application of the penalty tax under Code Section 4980H(b).

Code Section 4980H(a) provides that the penalty tax on large employers not offering coverage is equal to the product of the “applicable payment amount” and the number of individuals employed by the applicable large-employer member (less the 30-employee reduction) as full-time employees during the month. The “applicable payment amount” for 2014 is $166.67 with respect to any month (that is, 1/12 of $2,000).

Code Section 4980H(b)(1) provides that the penalty tax is equal to $250 (1/12 of $3,000, adjusted for inflation after 2014) times the number of full-time employees for any month who receive premium tax credits or cost-sharing assistance (this number is not reduced by 30).

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