Quick Guide to Calculating the Business Health Insurance Tax Penalty

The Health Care Reform bill requires certain businesses to offer employees health insurance. Starting in 2014, businesses with more than 50 full-time equivalent employees will be required to either offer health care coverage or pay a tax penalty. So, how exactly do you calculate the business health insurance tax penalty?

The Business Health Insurance Tax Rule is NOT Simple:

Effective January 1st, 2015 (January 1st, 2014), "applicable large employers" will be required to offer "minimum essential coverage" that is “affordable” to their employees. "Applicable large employers" who fail to offer "minimum essential coverage" that is “affordable” will be required to pay a "penalty" on their tax return.

This Guide Will Use SIMPLE Questions to Help You Calculate the Health Insurance Tax Penalty for Any Business.

In order to calculate the business health insurance tax penalty, you must answer the following questions:

1) Are you an “applicable large employer”?
2) What qualifies as “minimum essential coverage”?
3) What is the penalty if I do not offer “minimum essential coverage”?
4) What is the penalty if I do offer “minimum essential coverage”, but it is not “affordable” for some of my employees?

1) Are you an “applicable large employer”?

For purposes of the business health insurance tax penalty, a company is defined as an applicable large employer on a calendar year basis. For example, a company could be an applicable large employer in 2015, but not in 2014. If the company employed 50 or more full-time employees on average during the preceding calendar year, they are an applicable large employer for the current calendar year.

A company is NOT an applicable large employer if the company:

employed less than 50 full-time employees on average during the previous calendar year, or
employed more than 50 full-time employees no more than 120 days during the previous calendar year due to a seasonal workforce.

Calculating the number of full-time employees.

Generally, a full-time employee is an employee who is employed on average at least 30 hours of service per week in a given month. However, for purposes of determining whether a company is an applicable employer, the company must include all full-time employees plus the full-time equivalent of its part-time employees.

To calculate the full-time equivalent of part-time employees, a company should add the number of hours worked by part-time employees and divide the total by 120.

The sum of the full-time employees and the full-time equivalent of the part-time employees is the number used to determine whether a company is an applicable large employer.

Simple translation: If you have less than 50 employees, you are not an applicable large employer. If you have 50 or more employees, you probably are an applicable large employer.

2) What qualifies as “minimum essential coverage”?

For purposes of the business health insurance tax penalty, minimum essential coverage is the minimum amount of health insurance coverage an applicable large employer must make available to avoid paying the maximum penalty (see #3, below).

In order to avoid paying the maximum penalty, the employer must offer each employee the ability to enroll in minimum essential coverage through an eligible employer-sponsored plan, which is:

any plan or coverage offered in the small or large group market within a State (including small business exchanges),
coverage under a grandfathered health plan, or
a qualified governmental plan.

3) What is the penalty if I do not offer “minimum essential coverage”?

An applicable large employer who does not offer minimum essential coverage may not have to pay a penalty.

The employer only pays a penalty if at least one employee enrolls in a health insurance exchange and also qualifies for premium subsidies and/or other tax credits from the federal government.

If at least one employee receives federal subsidies due to purchase of health insurance through an exchange in a given month, the employer must pay a monthly penalty based on the number of full-time employees employed during that month.

IMPORTANT: When calculating the amount of the penalty, the employer receives a credit of 30 full-time employees. (For example, a company with 50 full-time employees only has to consider 20 employees for purposes of the penalty).

The annual per employee penalty is $2,000.

To get the monthly per employee penalty, you simply divide the annual penalty by 12.

To calculate the total monthly penalty, you multiply the # of full-time employees employed during the month minus 30 by the monthly per employee penalty.

Example.

In February, ABC Manufacturing employs 60 full-time employees and does not offer minimum essential coverage. In February, at least one employee purchases health insurance through the exchange and receives premium subsidies from the federal government.

The annual per employee penalty is $2,000.

The monthly per employee penalty is $2,000*(1/12).

For purposes of this calculation, we only need to consider 30 full-time employee due to the 30-employee credit.

The total monthly penalty is equal to 30*2,000*(1/12) which is $5,000.

4) What is the penalty if I do offer “minimum essential coverage”, but it is not “affordable” for some of my employees?

An applicable large employer that offers minimum essential coverage to its full-time employees may still be required to pay a penalty if the coverage is not “affordable” for one or more employees.

An employer’s coverage is considered unaffordable for any full-time employees who, in a given month, enrolls in a health plan offered through an Exchange and are eligible to receive federal premium subsidies (or cost-sharing subsidies). An employee is only eligible for premium subsidies through the exchange if their required contributions for their employer's plan is greater than 9.5%.

If one or more full-time employees receive federal subsidies due to purchase of health insurance through an exchange in a given month, the employer must pay a monthly penalty based on the number of full-time employees who receive federal subsidies.

The annual per employee penalty for not offering affordable coverage is $3,000.

To get the monthly per employee penalty, you simply divide the annual penalty by 12.

To calculate the total monthly penalty, you multiply the # of full-time employees who receive premium subsidies (or cost-sharing subsidies) by the monthly per employee penalty.

The penalty is capped at a maximum of $2,000 per full-time employee per year.

Example.

In February, ABC Manufacturing employs 60 full-time employees and does offer minimum essential coverage. In February, three (3) employee purchase health insurance through an exchange and receive premium subsidies from the federal government. Thus, the coverage is unaffordable for three (3) employees for the month of February.

The annual per employee penalty is $3,000.

The monthly per employee penalty is $3,000*(1/12).

For purposes of this calculation, we only need to consider the 3 full-time employee who are receiving federal subsidies.

The total monthly penalty is equal to 3*3,000*(1/12) which is $750.

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