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The "A" and "B" Tax

06/06/2016

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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.

Relevant Citations:

LBMC can help you navigate through the extensive ACA requirements, determine any penalty exposure, and develop strategies to eliminate or reduce future penalty exposure. Learn about our ACA Compliance Consulting and Tracking services.

External PPACA Resources: