Avoiding the $100 Per Day Penalty under the ACA

Dec 11, 2014

Employer Payment plans may be in violation of the Affordable Care Act (ACA) and can result in fines up to $100 per day.For plan years beginning after 2013, the Affordable Care Act (ACA) institutes so-called market reform provisions that place a whole host of new restrictions on employer-provided group health plans. These new restrictions apply to all employer-provided group health plans-including those provided by small employers with less than 50 employees. Furthermore, they were not affected by the one or two year delays in the mandate for large employers to provide health coverage.

The penalty for violating the market reform restrictions is a punitive $100- per-day, per-employee penalty, or $36,500 per-employee, per-year [IRC Sec. 4980D(b)(1)].

Because of the ACA market reform requirements, employers are basically precluded from subsidizing or reimbursing employees for individual market health insurance policies where there is more than one employee participating in the plan. Neither can employers pay the premiums directly on the employee's behalf.

Employers can, however, do any of the following:

  • Provide a tax-free fringe benefit by purchasing an ACA-approved employer-sponsored group health plan. Small employers with 50 or fewer employees can provide a group health plan through the SHOP Marketplace. A Section 125 cafeteria plan can be set up for pretax funding of the employee portion of the premium.
  • Increase the employee's taxable wages to provide funds that the employee may use to pay for individual insurance policies. However, the employer cannot require that the funds be used to pay for insurance-it must be the employee's decision to do so (or not). The employer can claim a deduction for the wages paid. The wages are taxable to the employee, but the employee can claim the premiums as an itemized deduction subject to the 10%-of-AGI limit (7.5% if age 65 or older).

Source: Article was written by Senior Manager, Robin Tuttle Christian, CPA. Ms. Christian is Managing Editor of this publication as well as a coauthor and contributing editor of several PPC publications.