Whether you are a fan or not, President Obama destroyed health insurance for many Americans. The promises made by the president did not materialize and, in fact, made health insurance much more expensive and limited the types of plans and coverage that is available.
This all concerns the Affordable Care Act (“ACA”). The ACA requires employers of a certain size to provide health insurance coverage options for employees and their dependents. That sounds great, except in situations where compliance is either not possible or impracticable or where a taxpayer makes an honest mistake.
The rules do not provide any flexibility. Companies that don’t comply with ACA regulations face stiff IRS penalties. The penalties are large enough that they can mean that the business has to close its doors.
Who Qualifies as an ALE?
These rules apply to so-called “Applicable Large Employers” or ALEs. So who is an ALE?
An ALE is an employer with 50 or more full-time employees or “full-time equivalent” employees. Full-time status is defined as working 30 or more hours per week. Independent contractors are generally excluded when counting full-time employees.
It does not matter whether insurance coverage is not available for the type of business, whether not enough employees partake in the insurance so that the insurance companies will even offer coverage, or whether the number of employees is miscounted.
Take the example of misclassified employees. These are independent contractors whom the IRS later determines should be classified as employees rather than contractors. If misclassified employees are reclassified as full-time employees, previously non-ALE companies can surpass the 50 full-time employee threshold. This instantly renders them subject to play-or-pay penalties.
The penalties can be devastating for businesses.
Minimum Essential Coverage
The ACA’s “play-or-pay” provision requires ALEs to offer “minimum essential coverage” (“MEC”) that meets certain requirements. Specifically, the MEC should be:
- Affordable – Costs less than 9.86% of an employee’s household income in 2023
- Minimum value – Covers at least 60% of total allowed costs
ALEs must offer MEC to at least 95% of full-time employees and dependents up to age 26. Failing to do so triggers the play-or-pay penalty.
Play-or-Pay Penalties
ALEs must offer minimum essential health coverage to at least 95% of full-time staff to avoid ACA penalties. If an ALE fails this 95% test due to the inclusion of misclassified workers now deemed full-time employees, they face stiff non-compliance penalties.
For 2023, the play-or-pay penalty is $2,990 annually per full-time employee, excluding the first 30 employees. With 100 misclassified workers, penalties could reach $269,100 per year. These substantial fees continue until the ALE offers adequate coverage.
Penalties apply separately if coverage fails affordability or minimum value standards. Companies may face multiple penalties concurrently, rapidly multiplying the penalties.
Help With ACA Penalties
We are tax attorneys in Houston, Texas and we help with ACA penalties. This includes penalties for worker classification issues and honest mistakes.
If you have questions about ACA penalties or you have questions about worker classification, please call us at (713) 909-4906 for a free consultation.
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