On February 12, 2024, the Internal Revenue Service (“IRS”) announced updated penalty amounts for 2025 related to the employer shared responsibility (“pay-or-play“) rules under the Affordable Care Act (“ACA”). For calendar year 2025, the adjusted $2,000 penalty amount is $2,900, and the adjusted $3,000 penalty amount is $4,350. This is a decrease from the penalty amounts for the 2024 calendar year, which are $2,970 and $4,460, respectively.
Employer Action Items
- Applicable large employers (“ALEs”) should confirm that Minimum Essential Coverage (“MEC”) is being offered to 95% or more of the ALE’s full-time employees (those averaging thirty (30) or more hours of service each week).
- Determine if such offered coverage also meets minimum value (“MV”).
- Run reports and review pay information to determine if the offered coverage is “affordable” under at least one of the allowed safe harbors (i.e., federal poverty line, W-2 or rate of pay).
- Take steps to rectify any failures and reserve funds for any potential penalties that may result from any such failures.
Summary
Under the pay-or-play rules, an ALE is only liable for a penalty if at least one full-time employee receives a subsidy for coverage from the health insurance marketplace (the “Exchange”). Employees who are offered affordable, MV coverage are generally not eligible for these Exchange subsidies.
Depending on the circumstances, one of two penalties may apply under the pay-or-play rules:
- Under Internal Revenue Code (“IRC”) Section 4980H(a), an ALE will be subject to a penalty if it does not offer coverage to “substantially all” (generally, at least 95%) of its full-time employees (and dependents) and any one of its full-time employees receives a subsidy toward their Exchange plan. The monthly penalty assessed on ALEs that do not offer coverage to substantially all full-time employees and their dependents is equal to the ALE’s number of full-time employees (minus 30) multiplied by 1/12 of $2,900 for any applicable month (in 2025).
- Under IRC Section 4980H(b), ALEs that offer coverage to substantially all full-time employees (and dependents) may still be subject to a penalty if at least one full-time employee obtains a subsidy through an Exchange because the ALE did not offer coverage to the full-time employee or the ALE’s coverage is unaffordable or does not provide MV. The monthly penalty assessed on an ALE for each full-time employee who receives a subsidy is 1/12 of $4,350 for any applicable month (in 2025). However, the total penalty for an ALE is limited to the 4980H(a) penalty amount.
For More Information
- Revenue Procedure 2024-14 can be found here: https://www.irs.gov/pub/irs-drop/rp-24-14.pdf.
- IRS’s Webpage Employer Shared Responsibility Provisions can be found here: https://www.irs.gov/affordable-care-act/employers/employer-shared-responsibility-provisions.
- IRS’s Webpage Types of Employer Payments and How They are Calculated can be found here: https://www.irs.gov/affordable-care-act/employers/types-of-employer-payments-and-how-they-are-calculated.
For more information
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