Employers with operations in California should be familiar with the state’s Individual Mandate and the additional ACA reporting requirements, as they have been in effect since 2020.
Still, organizations are oftentimes slow to adapt to new changes, and since the California Franchise Tax Board (FTB) is issuing penalties for non-compliance, we thought it best to recap the requirements for applicable employers.
Understanding the California Individual Mandate
Originally signed into law in 2019, California’s Individual Mandate first went into effect in 2020. The initiative was in response to the federal Individual Mandate being struck down by the Trump administration. The state’s healthcare law mandates all residents obtain Minimum Essential Coverage (MEC) for a minimum of nine months or face a penalty, with few exceptions.
The healthcare law also imposes reporting requirements for select organizations.
Under the mandate, health insurance carriers and organizations that offer self-funded plans must file ACA information with the FTB annually. The information reported relates to employees’ and their dependents’ enrollment participation. Note that the ACA information reported captures details about non-employee enrollment as well.
What are the penalties for non-compliance?
Both organizations and individuals are subject to penalties under California’s Individual Mandate. Applicable organizations that don’t meet the filing deadlines will be subject to penalties of $50 per individual receiving coverage. For the 2022 tax year, the deadline for filing with the FTB is March 31, 2022. Submissions filed after this date will result in penalties.
The California Individual Shared Responsibility Penalty (ISRP) is either a flat penalty per household member or 2.5% of gross household income that exceeds California’s filing threshold, whichever is higher.
For the 2022 tax year, adults who don’t obtain coverage for the entire year could receive a minimum fine of $850. Dependent children under the age of 18 are subject to penalties of up to $425. The amounts for the 2023 tax year will be higher than in previous years.
There are a few exceptions for not receiving a penalty, including the following individuals:
- State residents with income below the tax filing threshold
- Members of a healthcare-sharing ministry
- Incarcerated persons may be exempt from the IRSP
A full list of individuals exempt from penalties can be found on the FTB website.
Why are there additional ACA reporting requirements?
California’s FTB has been tasked with enforcing the state’s healthcare mandate. As a mechanism for achieving that, the agency introduced additional reporting responsibilities for applicable organizations.
Employers offering health coverage through self-insured plans or employer-sponsored plans must generally report individual enrollment information to the FTB through the reporting of Form 3895C, unless already reported by an insurer via Form 1095-B.
These employer-submitted submissions help the FTB verify individual coverage enrollment and more easily identify who must pay an ISRP.
In addition, following the completion of each reporting year, the FTB publishes non-compliance information by March 31 annually. Their reporting includes the total number of penalties issued, the total amount collected, the average household income penalty amount, and the number of individuals who failed to obtain MEC.
The big picture
California’s Individual Mandate is one of many in the U.S., including Washington D.C., Rhode Island, and New Jersey. These states’ Individual Mandates have resulted in greater healthcare participation but have also created challenges for employers and their ACA compliance efforts.
That’s because the state reporting responsibilities are in addition to the federal Employer Mandate, which requires employers with 50 or more full-time employees and full-time equivalent employees, known as Applicable Large Employers to:
- Offer MEC to at least 95% of their full-time employees and their dependents whereby such coverage meets Minimum Value
- Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability
Organizations file this information with the IRS annually via Forms 1094-C and 1095-C. And like California’s healthcare mandate, failing to comply can result in significant penalties, like Letter 226J.
If your organization is facing challenges in complying with the ACA’s Employer Mandate or additional state ACA reporting, download the ACA Essential Guide to get a better understanding of what is required of you.
For information on ACA penalty amounts, affordability percentages, important filing deadlines, steps for responding to penalty notices, and best practices for minimizing IRS penalty risk, download the ACA 101 Toolkit.