Large Employer Health Coverage Excise Tax

• Posted on July 6, 2010
• XML
• Questions?
• Share This
• Printable PDF

Large employers, generally those with 50 full-time employees in the prior calendar year, that:

o Do not offer coverage for all its full-time employees,

o Offer minimum essential coverage that is unaffordable (employee contribution is more than 9.5% of the employee's household income), or

o Offer minimum essential coverage where the plan's share of the total allowed cost of benefits is less than 60%,

Would be required to pay a penalty if any of its full-time employees were certified to the employer as having purchased health insurance through a state exchange and qualified for either tax credits or a cost-sharing subsidy discussed previously.  (Code Sec. 4980H(a))

Interaction with Premium Credit Generally, if an employee is offered affordable minimum essential coverage under an employer-sponsored plan, he is ineligible for a premium tax credit and cost-sharing reductions for health insurance purchased through a state exchange. However, if the coverage is unaffordable (see above) or the plan’s share of benefits is less than 60%, then he is eligible, but only if he declines to enroll in the coverage and purchases coverage through the exchange instead.

Penalty - Employer Not Offering a Health Care Plan – An applicable large employer would be liable for the penalty (figured monthly) if the employer:

1)  Fails to offer to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and

(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee.

The excise tax penalty for any month would be $167 ($2,000/12) times the number of full-time employees in excess of 30.

Example – No Health Care Plan – In January of 2014, an applicable large employer with 120 employees does not offer a health care plan to its employees. Ten of the employees are certified as being enrolled in January in a qualified plan and three of those employees were eligible for a premium tax credit.  The penalty is $167 times the number of full-time employees in excess of 30.  Thus, the penalty for the month of January is $15,030 ((120-30) x $167.00). If none of the 10 employees covered by qualified plans had received the premium tax credit, the employer would not have paid any penalty.

Penalty – Employees Qualify for Premium Tax Credits or Cost-Sharing Assistance – An applicable large employer would be liable for the penalty (figured monthly) if the employer:

(1)  Offers to its full-time employees (and their dependents) the opportunity to enroll in “minimum essential coverage” under an “eligible employer-sponsored plan” for that month; and

(2) At least one full-time employee has been certified to the employer as having enrolled for that month in a qualified health plan for which a premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee;

The excise tax penalty for any month would be $250 ($3,000/12) times the number of full-time employees that receive premium tax credit or cost-sharing reductions through an Exchange but not to exceed the penalty imposed had the employer not offered health care insurance. 

Example – Health Care Plan but Employees Qualify for Premium Tax Credit or Cost Sharing Reductions – In January of 2014, an applicable large employer with 120 employees offers a health care plan to its employees, but the cost of the plan does not meet the affordable criteria (employee contribution is more than 9.5% of the employee's household income or the plan's share of the total allowed cost of benefits is less than 60%) and 20 of the employees sign up for the insurance through an exchange and receive Premium Tax Credit or Cost-Sharing Reductions.  The employer’s excise tax penalty is $250 times 20.  Thus, the penalty for the month of January is $5,000.

Penalty – Decision Tree – The flow chart below provides and overview of the large employer health care excise tax.



Applicable Large Employer - An “applicable large employer” is one that employed an average of at least 50 “full-time employees” on business days during the preceding calendar year (for an employer that wasn't in existence throughout the preceding calendar year, the determination is based on the average number of employees reasonably expected to be employed on business days in the current calendar year). But under an exemption, an employer will not be considered to employ more than 50 full-time employees if: (a) the employer's workforce exceeds 50 full-time employees for 120 days, or fewer, during the calendar year; and (b) the employees in excess of 50 employed during that 120-day (or fewer) period were seasonal workers, e.g., retail workers employed exclusively during the holiday season.  Special rules apply to construction industry employers.

Part-Time Employees - Solely for purposes of determining whether an employer is an applicable large employer, an employer will also have to include for that month the number of full-time employees determined by dividing (a) the aggregate number of hours of service of employees who are not full-time employees for the month by (b) 120.  

Example – Equivalent Full-Time Employees - For his business, John has 45 full-time employees plus he has 20 part-time employees.  His part-time employees for the month of January worked 960 hours.  That is the equivalent of 8 (960/120) full-time employees.  Thus, the number of John’s full-time employees for the month of January is 53 (45 + 8). 

Penalty Deductibility – This excise tax penalty is nondeductible under the general rules for excise taxes.