Calculating Penalties Under the Affordable Care Act - Worked Example

Author: Tracy Morley, XpertHR Legal Editor

The employer shared responsibility provisions of the Affordable Care Act (ACA), often referred to as the employer mandate or the "pay or play" mandate, require employers to offer full-time employees and their dependents minimum essential health coverage that is affordable and that provides minimum value, or else pay a penalty.

Employers with 50 or more full-time employees and full-time equivalent employees (FTEs) must offer coverage to at least 95 percent of full-time employees in order to avoid a penalty.

An employer that meets the threshold of 50 full-time employees and FTEs may be required to pay one of two penalties.

  1. An employer that does not offer minimum essential coverage to its full-time employees and dependents may have to pay a "no coverage" penalty if any full-time employee receives subsidized coverage through an exchange. The law set the annual "no coverage" penalty at $2,000 for each full-time employee in excess of 30 employees. However, the penalty amount is inflation-adjusted (increased to $2,080 for 2015 and $2,160 for 2016).
  2. An employer that does offer minimum essential coverage to its full-time employees and dependents may have to pay an "unaffordable/inadequate coverage" penalty if the coverage offered is not considered affordable or does not provide minimum value and at least one full-time employee receives subsidized coverage through an exchange. The annual "unaffordable/inadequate coverage" penalty is the lesser of:
    • The "no coverage" penalty; and
    • $3,000 for each full-time employee receiving subsidized coverage. The amount is also inflation-adjusted (increased to $3,120 for 2015 and $3,240 for 2016).

Both penalties are determined on a month-by-month basis.

Note: For purposes of the following sample calculations, the 2016 penalty amounts were used.

Scenario 1 - Large Employer Not Offering Health Coverage (No Coverage Penalty)

Acme Insurance Company does not offer minimum essential coverage to its full-time employees. In March, Acme employs 100 full-time employees, and seven full-time employees receive subsidized coverage through an exchange.

To calculate the pay or play no coverage penalty, Acme Insurance Company takes the following steps:

  1. Calculate the monthly per employee penalty. The no coverage penalty is determined on a month-by-month basis and is $180 ($2,160 ÷ 12).
  2. Determine the number of full-time employees on which the penalty is owed. The penalty is applied to each full-time employee in excess of 30. For Acme, the number of full-time employees on which the penalty is calculated for the month of March is 70 (100 - 30).
  3. Calculate the total penalty for the month of March. Acme owes a penalty for each full-time employee in excess of 30. The total penalty for the month of March is $12,600 (70 x $180).

Assuming no changes in staffing levels from March through December, Acme owes a penalty of $126,000 for that year ($12,600 x 10). The penalty for a full 12 months (again, assuming consistent staffing levels) would be $151,200 ($12,600 x 12).

Scenario 2 - Large Employer Offering Unaffordable Health Coverage (Unaffordable/Inadequate Coverage Penalty)

Acme Insurance Company offers minimum essential coverage to its full-time employees, but the coverage is not affordable for some employees. In March, Acme employs 100 full-time employees, and seven full-time employees receive subsidized coverage through an exchange. The unaffordable/inadequate coverage penalty is the lesser of the no coverage penalty or $3,000 (as adjusted for inflation) for each full-time employee receiving subsidized coverage.

To calculate the pay or play unaffordable/inadequate coverage penalty, Acme Insurance Company takes the following steps:

  1. Calculate the monthly per employee penalty. The unaffordable coverage penalty is determined on a month-by-month basis and is $270 ($3,240 ÷ 12).
  2. Determine the number of full-time employees receiving subsidized coverage through an exchange. For Acme, the number of full-time employees receiving subsidized coverage for the month of March is seven.
  3. Calculate the total penalty for the month of March. Acme owes a penalty for each full-time employee receiving subsidized coverage through an exchange. The total penalty for the month of March is $1,890 ($270 x 7).

Assuming no changes in staffing levels from March through December, Acme owes a penalty of $18,900 for that year ($1,890 x 10). The penalty for a full 12 months (again, assuming consistent staffing levels) would be $22,680 ($1,890 x 12).