The Patient Protection and Affordable Care Act, also known as PPACA, healthcare reform, Obamacare, Affordable Care Act or the ACA, is a law enacted on March 23, 2010, which issued new rules and guidelines on the offering, administration, and acceptance of healthcare coverage in the United States. PPACA directly regulates healthcare providers, insurance companies, individuals, and employers. The law was amended by the Health Care and Education Reconciliation Act on March 30, 2010.

The law is quite broad, affecting insurance companies, hospitals, individuals, and employers. Many of the law’s sections have different effective dates. For instance, the individual mandate, the piece of PPACA which requires that individuals obtain a level of health coverage known as “minimum essential coverage” or face a tax penalty, went into effect in 2014. The employer mandates, or rules in PPACA which require employers to provide certain levels of coverage to certain employees, went into effect in 2015.

Since PPACA regulates a number of different areas regarding healthcare coverage, it naturally contains a number of separate provisions. Many of these provisions also have associated regulations which offer further guidance. Guidance is offered by the three main departments which regulate PPACA: the Internal Revenue Service (IRS), the Department of Labor (DOL), and the Department of Health and Human Services (HHS).

Recent Updates

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7/11/2019: The Affordable Care Act’s employer-shared responsibility payment can’t be waived or reduced. IRS Information Letter 2019-0008 explains that the employer shared responsibility payment (ESRP) can’t be waived or reduced based on hardship or other factors. Applicable large employers (ALEs) that don’t offer qualified health care coverage to substantially all their full-time employees may be liable for an ESRP. The ESRP, commonly known as the “employer mandate,” is a penalty that is assessed and collected like a tax. (IRS 19-0008) https://www.irs.gov/pub/irs-wd/19-0008.pdf
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1/11/19: The U.S. House is authorized to intervene and defend the Affordable Care Act (ACA) in court. By a vote of 235 to 192, the House adopted Title III of the Rules of the 116th Congress, which authorizes the House Speaker to intervene in the federal court case in Texas that challenges the ACA’s fundamental constitutionality, and in any appellate proceedings arising from the case. In the case, a district court held that, in light of the elimination of the shared responsibility payment (the individual mandate), effective 1/1/19, the ACA as a whole couldn’t stand.
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12/18/18: A U.S. District Court judge ruled that the Affordable Care Act (ACA) is unconstitutional because the Tax Cuts and Jobs Act eliminated the tax penalty under the individual mandate. The case is likely to be appealed to the U.S. Supreme Court. The judge sided with 20 states that argued that eliminating a penalty for not having health insurance invalidated the ACA. Once the tax penalty was eliminated, he concluded the law was no longer constitutional.

History of ACA

Comprehending the ACA and every change it has gone through can be tough, which is why it is always a good idea to seek professional advice to ensure you are compliant when trying to navigate all of its complexities. And, understanding the ACA’s history is important. Here’s a brief timeline:

  • 2010: President Obama signed the ACA into law.
  • 2011: After some controversy involving a Florida judge ruling that the ACA is unconstitutional in 2010, the Supreme Court repealed the ruling and determined that the ACA is, in fact, constitutional, upholding all provisions stated within it.
  • 2012: Obama is reelected, ensuring that ACA was here to stay.
  • 2013: Health insurance exchanges opened, which began policy writing that would become effective as of 2014.
  • 2014: ACA policies go into effect, including provisions such as prohibiting cost-sharing preventive services and coverage denial for applicants with pre-existing conditions.
  • 2015: In March, an estimated 16 million people, who previously lacked health insurance, are now covered. About 8 million of those people receive subsidies through federal exchanges.
  • 2016: The ACA is revised and updated. Changes include expanding the definition of a small employer, from 1-50 employees, to 1-100 full-time equivalent employees, allowing businesses with 51-100 employees to use the Small Business Health Options Program (SHOP), increasing the out-of-pocket maximum for employees, and increasing the dreaded penalties for failing to provided individual statements to full-time employees, or worse, failing to enroll for health insurance at all.

Goals and Methods of PPACA

The balance of PPACA is the expansion of a number of individuals who receive healthcare coverage in the United States against tighter rules on what kind of healthcare coverage may be offered to such individuals.

In general, this balance was reached by first enacting a number of regulations on insurance companies. By regulating insurance companies, healthcare coverage will improve and offer a greater benefit to individuals who obtain such coverage. However, these increased regulations will increase the cost of healthcare coverage.

Second, the individual mandate was included to ensure that individuals would obtain health insurance coverage. By expanding the number of individuals seeking health insurance coverage, the price of such coverage decreases.

A number of arguments have been presented by different interest groups and unbiased studies concerning the overall effect of this balance on the price of healthcare coverage. Under certain assumptions and pricing methodologies, PPACA could be shown to either cause a cost decrease or a cost increase. As implementation of PPACA continues, these arguments will be readjusted to better reflect the effects.

While some arguments exist on whether PPACA will improve the benefit of healthcare coverage in the United States, the arguments tend to stem from ancillary issues, such as smaller healthcare networks or problems with healthcare exchanges. The rules which regulate insurance companies, such as a prohibition on pre-existing condition stipulations for certain benefits or guaranteed issue requirements, are generally seen as beneficial to individuals from a benefit perspective.

Challenges of PPACA

PPACA has been controversial and highly contested since its inception. It has been challenged in a number of different venues for a litany of reasons. These provocations have included legal challenges, political challenges, and implementation challenges.

Individual Mandate

The highest-level challenge to PPACA questioned, among other things, the constitutionality of the individual mandate. This challenge reached the Supreme Court of the United States in National Federation of Independent Business, et al. v. Sebelius, Secretary of Health and Human Services et al. On June 28, 2012, the Supreme Court issued its opinion on this case, deeming the individual mandate to be constitutional.

PPACA has also been challenged on its ability to issue subsidies and excise taxes in States which do not form a health insurance exchange. Two cases, Pruitt v. Sebelius and Halbig v. Sebelius, both challenge PPACA on this issue. This case also reached the Supreme Court, who ruled against this challenge.

The HHS Mandate, which requires employers to provide contraceptive coverage in their healthcare coverage to eligible employees, has also been challenged by dozens of different groups. The results of these challenges have been varied, but a national precedent has yet to be set.

Politically, PPACA has been challenged through numerous efforts to repeal the law entirely. Other tactics, such as amending certain provisions or defunding implementation, have also been explored. Overall, these efforts have yet to see tangible success.

Compliance has had its importance magnified by increasing government interference in and scrutiny of employer-sponsored health plans. PPACA includes compliance requirements for supplementary documents such as a Summary of Benefits and Coverage or exchange notification.

PPACA takes a dim view of noncompliance, with a multitude of excise tax penalties for those who violate its provisions. Perhaps the most dangerous, but ironically least discussed penalty is under IRC § 4980D. This penalty is for general violations of PPACA provisions, especially the insurance and plan design reform statutes. The penalty is harsh, levying $100/affected employee/day against employers out of compliance, which can add up significantly. 

PPACA’s Employer Mandate: Healthcare Coverage

At this time, organizations with 50 or more full-time or full-time equivalent employees are required to offer affordable, minimum essential health coverage to at least 95% of this group. If this is not met, employers have to pay a penalty. Individual mandate requires adults without insurance to apply for an ACA-compliant policy, and, if this isn’t met, will have to pay a tax penalty. Two things might happen:

  1. The definition of a full-time employee could potentially change. Currently, it’s an employee who works 30 or more hours a week. The Republican Party has announced that it’s thinking about changing the definition to an employee who works 40 hours a week. This allows employers to decide how they want to cover the 30- to 40-hour working employees from a business standpoint.
  2. The Employer Mandate could be removed altogether, which allows employers to decide what they want to offer to their employees for health insurance. The Individual Mandate could be repealed altogether, too, which takes away the requirement of purchasing insurance at all.

There are more changes for businesses with 50 to 100 employees. While they may be considered a small group employer for insurance purposes, they will be considered a large group employer for Employer Mandate penalty calculations. Employers are now required to offer affordable, minimum essential health coverage to at least 95 percent of their full-time employees, as well as their dependents (up to age 26), or pay a penalty. Previously, this mandate had only applied to businesses with over 100 employees but will now apply to employers who have between 50 and 100 full-time employees.

Under PPACA, some employers are required to first provide healthcare coverage to their employees, and second to ensure this coverage meets a certain standard. Thus, the “employer mandate” is really two separate mandates.

The driving force behind these mandates is the concept of “pay or play.” Employers must either pay excise taxes for violating one of the employer mandates or play by offering health coverage which complies with PPACA standards.

The employer mandates only apply to full-time employees. Employers are not obligated to provide health care coverage to part-time employees, seasonal employees, or unlawfully present individuals. Note that future healthcare non-discrimination rules may affect employer obligations towards these types of employees.

The first mandate is known as the opt-out penalty, or the “A” tax. This penalty applies to applicable large employers, not small employers.

The second mandate is known as the qualified and affordable coverage penalty, or the “B” tax. This penalty applies to applicable large employers who elect to offer minimum essential coverage to at least 95% of their full-time employees.

Applicable Large Employers

Two other excise tax penalties under PPACA comprise the employer mandates. These penalties are assessed against applicable large employers who fail to offer (mandate #1) minimum essential coverage, as well as (mandate #2) affordability and minimum value.

Under mandate #1, an employer will be liable for $2,160 per full-time employee per year if the employer does not offer minimum essential coverage to at least 95% of full-time employees. This penalty is also known as the “opt out penalty,” because employers who choose to offer no plan will be subject to this penalty.

Under mandate #2, an employer will be liable for $3,240 per full-time employee who qualifies for a government subsidy on a public exchange plan. The trigger for this penalty is the employee’s qualification for an exchange subsidy. Employers may prevent this subsidy access by offering a plan with affordability and minimum value. Affordability means roughly that the premium for the plan costs the employee no more than 9.66% of the employee’s monthly adjusted gross income. One simple way of determining monthly adjusted gross income is by dividing the employee’s W-2 annual income by 12. Minimum value is a complex calculation weighing the amount of money spent by the employee on the employer’s plan compared to a standardized plan. Most plans meet this test, but employers are encouraged to have minimum value certified by any plan designer they may utilize.

Note that employers can only meet mandate #2 by denying subsidy access to employees. This circumstance is a natural tension between employer and employee created by PPACA. Great care must be taken by employers to sufficiently educate employees on the necessity of subsidy access denial.

Even if employers offer a compliant plan, they may still face excise tax liability due to the method by which exchange subsidies are granted. Subsidies are granted based on the application of the employee only. If the employee is not aware of the employer’s compliance or inadvertently leaves out critical information on their application, they will be pre-qualified for a subsidy by the exchange. Once pre-qualified, the employer will be notified that unless an appeal is filed, subsidy access will be granted and the employer will be excise taxed. This appeal will be similar to an IRS audit of the plan’s compliance. Employers are encouraged to keep all necessary documents in place and at the ready, as these appeals will likely be necessary exercises for most employers this fall.

The "A" and "B" Tax

The PPACA employer mandates are enforced by two penalties: the “A” tax and the “B” tax.

“A” Tax

The “A” tax, otherwise known as the opt out penalty, is assessed on applicable large employers who fail to offer minimum essential coverage to at least 95% of their full-time employees. The amount of the “A” tax is $2,000 per full-time employee per year (less thirty full time employees), or roughly $167 per full-time employee per month. The penalty is an excise tax and is thus not deductible as an ordinary and necessary business expense.

The “A” tax applies to applicable large employers, not small employers. Applicable large employers employ at least 50 full-time employee equivalents, while small employers do not. The mandate takes effect the month an employer becomes an applicable large employer or the beginning of an applicable large employer’s tax year.

“B” Tax

The “B” tax, also known as the non-qualified and unaffordable penalty, is assessed on applicable large employers who offer minimum essential coverage to at least 95% of full-time employees, but at least one full-time employee elects a state exchange plan instead of the employer’s plan and qualifies for an exchange subsidy. As the previous sentence conveys, the “B” tax is more complex than the “A” tax and will be explained in more detail below.

The amount of the “B” tax is $3,000 per full-time employee per year, or $250 per full-time employee per month. The penalty is only assessed for each full-time employee who qualifies for an exchange subsidy. The maximum penalty is the same as the “A” tax. Thus, if two-thirds or more of an applicable large employer’s full-time employees (assuming over-counting provisions) qualify for an exchange subsidy, the penalty is capped as if only two-thirds of the full-time employees qualified for an exchange subsidy.

Mechanics of the “B” Tax

The “B” tax is assessed on an applicable large employer when a full-time employee qualifies for an exchange subsidy. Let’s examine how this circumstance could occur.

First, if an applicable large employer declines to offer minimum essential coverage, the “A” tax applies. If an applicable large employer chooses to offer minimum essential coverage to at least 95% of full-time employees, then the “B” tax may apply.

The “B” tax triggers when a full-time employee qualifies for an exchange subsidy. An exchange subsidy is only available to a full-time employee if the full-time employee’s employer does not offer qualified and affordable coverage. Qualified and affordable coverage is a higher standard of health care coverage than minimum essential coverage. In general, qualified coverage is at least 60% of the allowed benefits total cost in the plan. Affordable coverage is health care coverage which costs an employee no more than 9.5% of his or her monthly adjusted gross income. If an employer’s health care coverage is not qualified and affordable, then the employer’s full-time employees may qualify for an exchange subsidy. Note that any individual must also satisfy an income test to qualify for an exchange subsidy.

Thus, if an employer’s plan is not qualified and affordable, the employer could be subject to the “B” tax if full-time employees apply for and receive an exchange subsidy. The employer can control “B” tax liability by offering a qualified and affordable plan.

Effective Date of the “A” and “B” Tax

The “A” and “B” tax went into effect on January 1, 2014. However, employers were not obligated to report on their compliance with the “A” or “B” tax in 2014 due to a delay of the reporting requirements by the IRS. Penalties were not assessed in 2014 as well.

Due to the delay, the employer mandates went into effect on January 1, 2015. Other forms of transitional relief are no longer applicable, as they applied only to 2014.

Calculating the Penalty

Penalties are calculated on a month-by-month basis, reported at the end of the employer’s tax year. Thus, for every month a full-time employee receives an exchange subsidy, their employer will owe $250 in excise taxes, up to the cap described above.

If the employer offers minimum essential coverage to at least 95% of full-time employees for six months, assuming static employment of all full-time employees, the penalty will be equal to $1,000 per full-time employee per year. To prevent over-counting, the first thirty (30) full-time employees are not counted in the calculation of the “A” tax in a given month. If the employer offers minimum essential coverage to less than 95% of full-time employees, this offering does not diminish the total penalty amount.

Employee Qualification for Exchange Subsidies

Since the “B” tax stems from the qualification for exchange subsidies, employers have an interest in being involved in the process through which exchange subsidies are granted. Exchange subsidies are granted when an individual applies for a state exchange plan. According to current regulations, full-time employees who apply for and are eligible to receive exchange subsidies will be granted the subsidies on a pre-qualified basis. Notice of this pre-qualification will be provided to the full-time employee’s employer, alerting them of impending excise tax liability and verifying the fact that the employer does not offer a qualified and affordable plan. Employers will have a small window of time to appeal this status and dispute excise tax liability.

Examples of “A” Tax

  1. Employer A has 100 full-time employees. On January 1, 2015, Employer A does not offer minimum essential coverage to any full-time employees, nor at any point during the year. Employment is static for the year. The total excise tax liability of Employer A is (100 – 30) x 2,000 = $140,000.
  2. Employer B has 100 full-time employees. On January 1, 2015, Employer B does not offer minimum essential coverage to any full-time employees. On July 1, 2015, Employer B decides to offer minimum essential coverage to all 100 full-time employees. Employer B thus complies with the employer mandate “A” tax for six out of months in 2015. Employment is static for the year. The total excise tax liability of Employer B is [(100 – 30) x 2,000] x 6/12 = $70,000
  3. Employer C has 30 full-time employees, but due to a high number of part-time employees, Employer C is an applicable large employer. On January 1, 2015, Employer C does not offer minimum essential coverage to any full-time employees nor at any point during the year. Employment is static for the year. The total excise tax liability of Employer C is (30 – 30) x 2,000 = $0.
  4. Employer D has 100 full-time employees. On January 1, 2015, Employer D does offers minimum essential coverage to 50 full-time employees and continues this plan for the duration of the year. Employment is static for the year. The total excise tax liability of Employer D is (100 – 30) * 2,000 = $140,000.

Examples of “B” Tax

  1. Employer A has 100 full-time employees. Employer A offers minimum essential coverage, but the plan is not qualified and affordable. On January 1, 2015, 20 full-time employees receive exchange subsidies, and continue to do so for all of 2015. The total excise tax liability of Employer A is 20 x 3,000 = $60,000.
  2. Employer B has 100 full-time employees. Employer B offers minimum essential coverage, but the plan is not qualified and affordable. On January 1, 2015, 46 full-time employees receive exchange subsidies, and continue to do so for all of 2015. The total excise tax liability of Employer B is 46 x 3,000 = $138,000.
  3. Employer C has 100 full-time employees. Employer C offers minimum essential coverage, but the plan is not qualified and affordable. On January 1, 2015, 47 full-time employees receive exchange subsidies, and continue to do so for all of 2015. The total excise tax liability of Employer C is 47 x 3,000 = $141,000 > Maximum cap of $140,000.
  4. Employer D hires Employee X on January 1, 2014. Employee X applies for a state exchange plan and receives an exchange subsidy for all of 2014. On October 15, 2014, during the state exchange plan’s open enrollment period, Employee X reapplies for a state exchange plan in 2015. Employee X is pre-qualified for an exchange subsidy. The state exchange sends a notice of this pre-qualification to Employer D. Employer D fails to appeal. Regardless of what health care coverage Employer D may offer, Employer D will owe excise taxes for each month in 2015 that Employee X continues to both work for Employer D and receive an exchange subsidy.

Preparing for Obamacare

To prevent excise taxes, excess costs, and the interference of appealing exchange subsidies, employers have a couple of solutions available: deny and design.

Deny – to decline eligibility to certain employees or classes of employees, as appropriate to their position and the employer’s ability to fund health benefits. Denial may be achieved through management of look-back and stability periods.

Design – to efficiently create a health plan such that offering coverage is still less expensive than paying an excise tax under the opt-out penalty. Such plan designs are available to most employers, but specific details of the design are typically dependent on a case-by-case analysis of the employer’s finances, employee pool, history with health plans, and other needs regarding the plan. If an employer must offer a plan, the least expensive plan should at least be considered by the employer for certain employees or classes of employees.

From an implementation perspective, PPACA has seen a number of various issues. These issues include state exchange plans attracting a smaller number of insurance companies than desired, the main enrollment hub (www.healthcare.gov) experiencing severe technical difficulties, and a lack of clarity in several regulations. While certain issues will likely be resolved over time, some outstanding matters, such as the potential for adverse selection on state exchange plans, may threaten the viability or economic efficiency of PPACA, which could have lasting effects.

PEO to the Rescue

Some of the most important ways health care reform can benefit small businesses are by broadening coverage options, maximizing purchasing power, reducing costs, and granting back control over health care as a whole. Small businesses may even qualify for tax credits that can make ensuring employees more affordable. Above all, the effects of health care reform on small businesses and employees can take on many forms and can be an ongoing process.

A PEO (Professional Employer Organization) like LBMC Employment Partners, LLC, is an excellent resource for small businesses in need of HR management, employee benefits administration, payroll processing and tax filing, and compliance with laws and regulations.

Even more, a PEO can take the pressure off small business owners when it comes to staying compliant with new and rapidly-changing health care regulations. From helping calculate the number of full-time employees to employee classifications to medical coverage reporting, a PEO can offer solutions that help point small businesses toward success.

All in all, it’s important to learn more about your business rights, regulations, and how health care reform can directly affect you and your employees. With rapid provisions taking shape and growing in complexity, having a reliable partner to tackle health care reform is more important than ever.

Relevant Citations:

External PPACA Resources:

LBMC Employment Partners, LLC, is well versed in all things ACA. They can help you navigate through the extensive ACA requirements, determine any penalty exposure, and develop strategies to eliminate or reduce future penalty exposure.

Revised: 1/11/19; (Original post: 06/01/2016)