The IRS recently announced that the ACA penalty assessments issued for non-compliance with the Employer Mandate are increasing for the 2023 tax year.
Below we highlight the new penalty amounts as well as explain how the IRS identifies non-compliance and issues penalties
What is the 2023 ACA penalty 4980H(a) amount?
For the 2023 tax year, the 4980H(a) penalty, also known as the hammer penalty, is $240, which comes out to an annualized amount of $2,880, per employee.
The IRS issues a 4980H(a) penalty when an organization fails to offer Minimum Essential Coverage (MEC) to at least 95% of its full-time employees for any month during the year and has at least one employee obtain a Premium Tax Credit (PTC) from a state or federal ACA health exchange.
Here’s an example of how the 2023 4980H(a) penalty can impact an organization.
John’s Pizza Parlor employs 300 full-time employees. The company offers MEC to 250 of them, which is 83% of its workforce and below the ACA’s 95% requirement. One employee, who did not receive an offer of MEC, signed up for coverage through the state ACA health exchange. The health exchange then issued a PTC to the employee for all 12 months of the year.
When the exchange provided the employee with a PTC, it informed the IRS of the request. With PTC recipient information, the IRS then cross-references it with John’s Pizza Parlor 1095-C filings for the applicable tax year and identifies how many full-time employees it had so that it can calculate and assess a 4980H(a) penalty. It only takes one employee to trigger the entire full-time workforce, minus the standard 30 exemption.
As a result, John’s Pizza Parlor was hit with a 4980H(a) penalty in the amount of $777,600.
Here’s the formula:
12 months x $240 = $2,880
$2,880 x (300-30) – $777,600
What is the 2023 ACA penalty 4980H(b) amount?
For the 2023 tax year, the 4980H(b) ACA penalty is $360 a month or $4,320 annualized, per employee. Unlike the 4980H(a) penalty the 4980H(b) penalty is assessed on a per violation basis.
The 4980H(b) penalty is assessed when an employer offers its full-time employees coverage that was either unaffordable, not Minimum Value, or both, AND had one of the employees receive a PTC from a state or federal health exchange.
Here’s an example of the 2023 4980H(b) ACA penalty.
John’s Pizza Parlor employs 100 ACA full-time employees. All 100 employees received an offer of coverage for the year, but as it turns out, the offers did not meet the IRS-mandated affordability threshold of 9.12% for the 2023 tax year. While it’s true that the coverage was unaffordable for all of the pizza parlor employees, only 50 of them obtained a PTC from the state health exchange.
As a result, John’s Pizza Parlor would receive a 4980H(b) penalty in the amount of $216,000.
Here’s the formula:
$360 x 12 = $4,320
$4,320 x 50 = $216,000
Understanding 4980H 2023 ACA penalties
It’s important to note that an employer will not be assessed both a 4980H(a) and 4980H(b) penalty for the same tax year. If an organization is found in violation of both ACA non-compliance requirements simultaneously, the greater penalty of the two will be assessed.
Similar to previous years, the IRS issues 4980H(a) and 4980H(b) penalties via Letter 226J, which it is currently doing for the 2019 tax year, though it should begin with the 2020 tax year soon.
As employers prepare their 2022 ACA filings and set their sights on the 2023 tax year, they should be mindful of the recent events relating to the IRS and healthcare in general. As part of the recently passed Inflation Reduction Act, the IRS will be receiving $80 billion in funding for tax enforcement, including the ACA’s Employer Mandate. In addition, the agency is bringing on over 87,000 new tax examiners.
When you couple this information with the fact that the Inflation Reduction Act also extends reduced healthcare subsidies and PTCs through 2025, you have the potential for significant ACA penalty assessments.
Diligent employers looking to avoid IRS penalties and ACA non-compliance should look outward for support. ACA software and in-house teams may not be properly equipped to handle IRS inquiries, affordability calculations, and year-end filings. Trusaic’s full-service solution, ACA Complete, handles all of these requirements for you and more.
In addition to receiving a dedicated ACA specialist, who will monitor and measure employee hours of services so you always extend an offer of coverage on time, ACA Complete includes IRS audit defense and record-retention. Let your staff get back to running your business and leave ACA compliance to the experts.
To learn more about how ACA Complete can help your business, check out the success story below.
For more information on Letter 226J, including best practices for responding to the penalty notice, download our white paper.