The IRS recently announced the ACA affordability percentage for the 2022 tax year and with that information comes speculation around the Employer Mandate’s IRC Section 4980H(a) and (b) penalty amounts for the 2022 tax year.
Under the ACA’s Employer Mandate, employers with 50 or more full-time employees and full-time equivalent employees, known as Applicable Large Employers (ALEs) must:
- Offer Minimum Essential Coverage (MEC) to at least 95% of their full-time employees (and their dependents) whereby such coverage meets Minimum Value (MV); and
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability.
Employers that fail to comply with these two requirements could be subject to IRC Section 4980H penalties via Letter 226J.
While the IRS has not explicitly confirmed the penalty amounts yet, experts have made estimations. For the 2022 tax year, the annualized 4980H(a) penalty will be $2,750 per employee, or $229.17 a month. The annualized 4980H(b) penalty will be $4,120 per employee or $343.33 a month for the 2022 tax year.
It’s important to remember that an employer will never receive both a 4980H(a) and 4980H(b) penalty for a specific reporting year. The IRS assesses these penalties in very different ways. The 4980H(A) penalty, also known as the hammer penalty, is issued to employers that fail to offer MEC to at least 95% of their full-time employees and their dependents.
For all reporting years after 2015, if this penalty is triggered, the assessed 4980H(a) amount will deduct 30 full-time employees from the total number of full-time employees.
Here’s an example of the 4980H(a) ACA penalty for the 2022 tax year. Rocco Pizza Parlor has 100 full-time employees and doesn’t offer MEC coverage to the employees or their dependents. The penalty amount would be (100 – 30) x $2,750 = $192,500.
The 4980H(b) penalty is used on a per-employee basis and applies to the single employee that receives a Premium Tax Credit from a state or federal health exchange. So long as the employer does not offer coverage that is affordable and not Minimum Value, the 4980H(b) penalty will be assessed.
Here’s an example of the 4980H(b) ACA penalty for the 2022 tax year. Johnny’s Saloon offers coverage that exceeds the ACA affordability threshold of 9.61% for a particular full-time employee. The employee declines coverage and opts to receive subsidized healthcare via a Premium Tax Credit (PTC) at the state health exchange.
The IRS would then issue a Letter 226J penalty to Johnny’s Saloon for the employee that received the PTC in the amount of $4,120.
It’s important to remember that the aforementioned 4980H ACA penalty amounts are estimations and are not final, though they are unlikely to change. Like the 2022 draft ACA reporting forms, the 4980H penalties are subject to change and are used to help prepare for future ACA compliance and reporting.
Recent IRS activity indicates that it is becoming more aggressive in the way it assesses ACA penalties. For example, employers must now prove why an ACA penalty shouldn’t be assessed by providing tangible evidence of math computations and affordability percentages.
The tax agency is currently issuing Letters 226J for the 2018 tax year and the precursor penalty notice, Letter 5699, for the 2019 tax year.
For more information on ACA penalty Letter 226J and the specific 4980H(a) and (b) penalty explanations, head to the What is Letter 226J? page.
If you need assistance responding to an ACA penalty, contact us to learn about how we can help. So far we’ve prevented over $1 billion in ACA penalty assessments for our clients.
Need help with ACA reporting this year? Download the Employer’s Guide to Coding ACA Form 1095-C.
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