Employers, take note: 2023 brings heftier IRS penalties for failure to comply with the ACA’s Employer Mandate.

Under the ACA’s Employer Mandate, ALEs, or employers with 50 or more full-time and full-time equivalent employees must:

• Offer Minimum Essential Coverage to at least 95% of their full-time employees and their dependents whereby such coverage meets Minimum Value, and
• Ensure that the coverage for the full-time employee is affordable based on one of the IRS-approved methods for calculating affordability

Failing to satisfy these requirements can result in organizations receiving steep penalty assessments from the IRS.

Below is an overview of 2023 ACA penalties and how the IRS assess them.

4980H(a) penalty

The 2023 4980H(a) penalty is $240, or $2,880 annually, per employee. The IRS issues a 4980H(a) penalty when:

• An employer doesn’t offer Minimum Essential Coverage to at least 95% of its full-time employees (and their dependents) for any month during the tax year, and
• At least one full-time employee receives a Premium Tax Credit (PTC) for purchasing coverage through a state or federal ACA marketplace

How the IRS calculates 4980H(a) penalty

If an organization in 2023 has 300 full-time employees, and one of these employees receives a PTC for 12 months, the penalty would be $777,600. Note: The per-employee penalty applies across all 300 full-time employees, minus 30, even if only one employee receives a PTC.

4980H(b) penalty

For the 2023 tax year, the 4980H(b) penalty is $360 a month, or $4,320 per year, per employee. Unlike 4980H(a), the IRS issues a 4980H(b) on a per-violation basis. In other words, the penalty is assessed for every employee that obtains insufficient coverage.

The IRS issues a 4980H(b) penalty when an employer offers its full-time employees coverage that was either:

• Unaffordable
• Not Minimum Value, or both
• And had one of the employees receive a PTC from a state or federal health exchange

This penalty is assessed on a monthly basis for every full-time employee that:

• Did not receive an offer of coverage, or
• Received such an offer, but the offer was either unaffordable or did not provide MV, or both
• And the employee received a PTC for that month

How the IRS calculates 4980H(b) penalty

For example, an employer with 10 full-time employees who each received a PTC for six months would incur a penalty of $21,600.

Note that employers cannot be assessed both 4980(a) and 4980(b) penalties for the same tax year. If an organization is found in violation of both requirements, the greater penalty of the two is assessed. Both the 4980H(a) and 4980H(b) penalties are issued via Letter 226J, which the IRS is currently using for the 2020 tax year. Penalties for previous years can also be issued as there is no statute of limitations on ACA penalties.

Failure to file penalty

The IRS also charges separate penalties for failure to file current information returns on time and provide correct payee statements. Monthly interest can accrue if the penalty amount isn’t paid in full.

For the 2023 tax year, the IRS ACA penalty for failing to file 1095-C forms is $290 per return if filed after August 1, 2023. The penalty amount increases to $580 if the employer intentionally disregards the filing responsibilities.

How the IRS calculates failure to file penalty

For example, an employer with 300 full-time employees who doesn’t file returns would incur an IRS penalty of $87,000. Intentional disregard would bring the penalty to $174,000 for that same employer.

Failure to Furnish Penalty

The failure to furnish penalty applies to employers who don’t provide correct 1095-C payee statements to employees as required by IRC 6722. The penalty is also $290 per return and doubles for intentional disregard.

IRS Enforcement Activity is on the Rise

There has been recent action at the federal level, including legislation that extends enhanced ACA subsidies issued via PTCs through 2025. As such, more workers are participating in state and federal ACA health exchanges, thus triggering the IRS to issue ACA penalty notices via 2023 Letter 226J. In addition to new legislation, the IRS has also received significant resources for tax enforcement, including 87,000 new agents and $80 billion in new funding.

On-time and accurate completion of filings should be at the top of employers’ priority lists to avoid incurring significant ACA penalties for 2023 as outlined above.

Assess your ACA compliance risk level with ACA Vitals so that you can move into this reporting season with confidence.