Don’t Let ACA Penalties Tax Your Business

With penalties for noncompliance rising, employers must pay attention to changing ACA penalties and parameters, like the just announced affordability percentage index for 2024.

With the IRS actively assessing potential penalties, it’s critical that your organization maintains Affordable Care Act (ACA) regulatory requirements. Penalty dollar amounts continue to rise year over year as does the likelihood that if your business is assessed a penalty, it could stick.  

During August 2023, a real-life illustration was shown highlighting how ACA requirements are not to be trifled with and the penalties are real. The case of “Optimal Wireless LLC v. IRS,” was before the U.S. Court of Appeals for the District of Columbia. In this case, the IRS assessed exactions against Optimal Wireless for not providing adequate coverage to some employees. Disagreeing with the penalties on procedural grounds, Optimal Wireless sued the IRS over the $1.1 million in penalties.

On August 8, 2023, the U.S. Court of Appeals ruled against Optimal Wireless, agreeing with an earlier U.S. District Court ruling, that the exactions were a form of a tax and exempt from lawsuits under the Anti-Injunction Act, which blocks lawsuits with the purpose of restraining tax collection. Based on this ruling, Optimal Wireless is on the hook for the over $1.1 million in penalties to the IRS.

Cost of ACA Employer Mandate Penalties to Rise in 2024

This ruling reinforces the severity and costliness of facing exactions under Section 4980H. Since the ACA’s inception in March 2010, regulations have evolved, and penalties have steadily risen year over year. In March 2023, the IRS announced that 4980H employer mandate penalties for non-compliant applicable large employers (ALEs) for 2024 are rising again. Here’s a recap:

  • Penalty A—failure to offer minimum essential coverage to 95% of full-time, benefit eligible employees—will increase from $2,880 ($240/month) in 2023 to $2,970 ($247.50/month) in 2024 .

  • Penalty B—failure to provide affordable, minimum value coverage to a benefit eligible employee—will increase from $4,320 ($360/month) in 2023 to $4,460 ($371.67/month) in 2024 .

These new penalty amounts will be effective beginning with the 2024 tax year.

Employers who are out of compliance with either condition may be subject to the recently increased IRS penalties. Under IRS definitions for the ACA, if an employer has at least 50 full-time employees (including full-time equivalent employees) during the prior year, that employer is considered an ALE (Applicable Large Employer) for the current calendar year. For either penalty to apply to an ALE, they must be out of compliance and at least one full-time employee must receive the premium tax credit for purchasing coverage through the Marketplace.

If your company is subject to this mandate, failure to meet these guidelines or to properly complete your IRS forms could expose your company to penalties that increase the longer you remain out of compliance.

Precipitous drop in the ACA Affordability percentage for 2024

On August 23, 2023, with the ruling from the Optimal Wireless case still fresh in our minds, almost as if on cue, the IRS announced the 2024 affordability percentage for employer health coverage.

The affordability threshold – used for employer shared responsibility provisions to determine whether employer-sponsored health coverage is considered affordable – decreased significantly to 8.39%, a decline from 9.12% in 2023. These percentages are used to determine the amount of household income eligible individuals can contribute toward the cost of coverage in order for it to be considered affordable. This percentage is important when setting employer contributions for self-only coverage for plans beginning on or after January 1, 2024. Coverage will be considered affordable if an employee’s required contribution for self-only coverage does not exceed 8.39% of their household income.

The cost of insurance coverage continues to rise year over year, and a share of those cost increases are typically passed along to employees. With the affordability percentage decreasing again, employers who are planning to toe the line with their healthcare premiums might find that while the cost is increasing, employee contributions might need to be lowered.

The rising costs of noncompliance should serve as a further incentive for you to examine your group health plan offerings to help ensure broad enough coverage to full-time employees with at least one self-only option that is affordable and provides minimum value benefits.

It is always a good idea to stay on top of your responsibilities under the law in order to help your business avoid unnecessary ACA risk and potential IRS penalties. To catch up on what else has happened so far in 2023 check out our ACA mid-year check-in.

The information provided is intended as general guidance and is not intended to convey any tax, benefits, or legal advice. For information pertaining to your company and its specific facts and needs, please consult your own tax advisor or legal counsel.  Equifax Workforce Solutions provides services that can help employers reduce their compliance risks. Details on our provision of these services and related support will be contained in your services agreement. Links to sources may be to third party sites. We have no control over and assume no responsibility for the content, privacy policies or practices of any third party sites or services.