The Affordable Care Act (ACA) introduced the employer shared responsibility provision, a regulation that requires certain employers to offer health coverage to their full-time employees.
Central to this provision is the 4980H penalty, which is assessed when an employer fails to meet the ACA's requirements. Understanding this penalty, why it’s triggered, and how to avoid it is essential for Applicable Large Employers (ALEs) who want to stay compliant and avoid costly financial repercussions.
This guide explores the 4980H penalty in detail, explaining its purpose, calculation methods, and strategies employers can use to ensure compliance and avoid penalties.
What is the 4980H Penalty
The 4980H penalty was established under the ACA to ensure that large employers provide affordable and adequate health coverage to their full-time employees. This penalty applies only to employers that meet the ACA’s definition of an Applicable Large Employer (ALE). An ALE is any business that employs at least 50 full-time or full-time equivalent employees during the previous calendar year.
The penalty is divided into two categories under the ACA: Section 4980H(a) and Section 4980H(b). These penalties are assessed when an employer either fails to offer coverage to a sufficient number of full-time employees or offers coverage that is deemed unaffordable or inadequate. The penalty serves as a financial incentive for businesses to meet their shared responsibility requirements under the law.
While the 4980H penalty aims to encourage compliance, it can be financially burdensome for employers who are unaware of or misunderstand their ACA obligations. Proper planning and understanding are essential to avoid unexpected liabilities.
What Triggers the 4980H Penalty?
The 4980H penalty is triggered when an ALE fails to meet specific ACA requirements regarding employee health coverage. The ACA defines two main scenarios that result in penalties being assessed:
The first scenario, governed by Section 4980H(a), occurs when an ALE fails to offer minimum essential coverage (MEC) to at least 95% of its full-time employees and their dependents. This failure opens the employer up to penalties if at least one employee receives a subsidy for purchasing health insurance through the Health Insurance Marketplace.
The second scenario, under Section 4980H(b), occurs when an ALE does offer coverage to the required percentage of employees, but the coverage is either unaffordable or fails to meet minimum value standards. Affordability is determined based on an employee’s income, while minimum value requires that the plan covers at least 60% of healthcare costs.
These penalties are often triggered by gaps in understanding ALE status, failure to track employee hours accurately, or errors in calculating and reporting health coverage data.
Calculating the 4980H Penalty
The 4980H penalty is calculated differently depending on whether the employer fails to offer coverage or offers coverage that doesn’t meet ACA standards.
For Section 4980H(a), the penalty is assessed based on the total number of full-time employees minus the first 30 employees. The penalty amount for 2023 is $2,880 per full-time employee annually. This penalty applies if even one employee receives a premium tax credit for purchasing coverage through the Marketplace.
For Section 4980H(b), the penalty applies to each employee who receives a subsidy because the employer’s coverage is either unaffordable or does not meet minimum value standards. The penalty amount is $4,320 per affected employee annually but is capped at the total penalty amount under Section 4980H(a).
The penalty calculations emphasize the importance of offering affordable and adequate health coverage to avoid penalties that can quickly add up and significantly impact an employer’s finances.
How Employers Can Avoid the 4980H Penalty
Employers can avoid the 4980H penalty by taking proactive steps to ensure compliance with ACA requirements. The first step is to determine whether your business qualifies as an ALE. This involves calculating the total number of full-time and full-time equivalent employees during the previous year.
Once ALE status is established, employers must ensure they offer minimum essential coverage to at least 95% of full-time employees and their dependents. The offered coverage must meet affordability and minimum value standards, which can be determined using IRS safe harbor methods.
Employers should also establish systems for accurately tracking employee hours to determine eligibility for health benefits. This is particularly important for businesses with variable-hour employees who may transition between part-time and full-time status.
Timely filing of ACA forms, including Forms 1094-C and 1095-C, is another critical component of compliance. Late or inaccurate filings can lead to penalties, even if the employer meets the coverage requirements.
Investing in compliance tools, such as ACA tracking software, can help streamline these processes and reduce the risk of errors.
Responding to IRS Notices Related to the 4980H Penalty
If the IRS identifies a potential compliance issue, it will send Letter 226J to inform the employer of a proposed 4980H penalty. This notice outlines the specific reasons for the penalty and provides details about the affected employees and coverage deficiencies.
Employers should respond promptly to Letter 226J, either agreeing with the IRS assessment or disputing the proposed penalty. Disputing the penalty requires the employer to provide documentation that demonstrates compliance, such as proof of coverage offerings, affordability calculations, and accurate employee data.
Failure to respond to the notice within the specified timeframe may result in the IRS finalizing the penalty assessment and initiating collection actions.
Employers who receive IRS notices related to the 4980H penalty should consult a professional for guidance to ensure their response is accurate and comprehensive.
Common Missteps Leading to the 4980H Penalty
The most common reasons employers face the 4980H penalty include misunderstanding their ALE status, failing to track employee hours accurately, and not offering affordable or adequate coverage. Businesses with variable-hour employees are particularly vulnerable to compliance issues, as they may misclassify employees or fail to monitor eligibility changes over time.
Errors in ACA filings are another frequent cause of penalties. Submitting inaccurate or incomplete Forms 1094-C and 1095-C can trigger audits or penalties, even if the employer is otherwise compliant. Additionally, failing to monitor and adhere to affordability thresholds can result in unexpected penalties under Section 4980H(b).
By understanding these common pitfalls, employers can take steps to mitigate risks and ensure compliance with ACA requirements.
The Role of Compliance Tools and Professional Guidance
Navigating ACA compliance and avoiding the 4980H penalty can be complex, especially for businesses with large or variable-hour workforces. Compliance tools, such as ACA tracking software, can simplify the process by automating employee hour tracking, eligibility determinations, and ACA form generation. These tools reduce the likelihood of errors and help ensure timely filings.
Professional guidance is also invaluable for businesses facing IRS notices or struggling to understand their ACA obligations. Tax and compliance experts can help employers assess their compliance status, respond to IRS notices effectively, and implement systems to prevent future issues.
Stay Ahead of the 4980H Penalty with 1095 EZ Online
The 4980H penalty is a critical component of the ACA’s employer shared responsibility provision, designed to ensure that businesses provide affordable and adequate health coverage to their employees. Understanding the triggers, calculations, and avoidance strategies for this penalty is essential for maintaining compliance and avoiding financial strain.
By proactively monitoring ALE status, offering compliant coverage, and utilizing compliance tools, employers can navigate their ACA obligations with confidence. For businesses needing additional support, professional services are available to guide them through the complexities of ACA regulations and protect against the 4980H penalty.
Employers should take action today to assess their compliance and implement measures to ensure a penalty-free future under the ACA. Avoid the 4980H penalty and stay compliant with ACA requirements. Get started with 1095 EZ Online today for seamless reporting solutions and expert guidance. Take the first step toward protecting your business—start now!