Affordable Care Act: Employer Penalties

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Jason B. Freeman

Jason B. Freeman

Managing Member


Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine, a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

The IRS recently issued the first wave of notices to employers, proposing penalty assessments for Employer Shared Responsibility Payments under Section 4980H of the Internal Revenue Code.  The current notices generally cover penalties for the 2015 tax year—subsequent-year penalty notices will likely be issued soon.  Many of the proposed assessments would result in penalties that total in the millions.  Employers receiving such a notice—a Letter 226-J—need to act quickly to defend against improper penalties.

The employer shared responsibility provisions were enacted under the Affordable Care Act and codified under section 4980H of the Internal Revenue Code.  Under the Affordable Care Act’s employer shared responsibility provisions, certain employers (known as applicable large employers or “ALEs”) must offer minimum essential coverage that is “affordable” and that provides “minimum value” to a percentage of full-time employees (and their dependents), or face penalty exposure—employers face this penalty exposure if even one of their full-time employees receives a premium tax credit for purchasing individual coverage on a Health Insurance Marketplace (Marketplace).[1]

IRC Section 4980H provides for the so-called employer mandate penalty.  Under that provision, an “applicable large employer” is exposed to a penalty if the ALE fails to make a timely offer at least annually to the required number of its full-time employees.  Employers with an average of at least 50 full-time employees (including full-time-equivalent employees) during the preceding calendar year are generally classified as an ALE.[2]  Section 4980H penalties come in two types: “A” and “B”.  The “A” penalty applies when an ALE does not offer coverage or offers coverage to less than 95 percent (absent transition relief) of its full-time employees (and their dependents), and at least one full-time employee receives a premium tax credit to help pay for coverage through a Marketplace Exchange.  The “B” penalty applies when an ALE offers coverage to at least 95 percent (absent transition relief) of its full-time employees (and their dependents), but at least one full-time employee receives a premium tax credit to help pay for coverage through a Marketplace, which may occur because the employer did not offer coverage to that particular employee or because the coverage the employer offered that employee was either unaffordable or did not provide minimum value.

Taxpayers facing 2015 proposed penalty assessments should carefully vet any applicable transitional relief provisions and other defenses.

Stay tuned for future updates and resources on ACA compliance, penalties and penalty defense from Freeman Law, PLLC.


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[1] In general, a full-time employee could receive the premium tax credit if: (1) the minimum essential coverage the employer offers to the employee is not affordable; (2) the minimum essential coverage the employer offers to the employee does not provide minimum value; or (3) the employee is not one of the at least 95 percent of full-time employees offered minimum essential coverage.

[2] If an ALE is made up of multiple employers (called applicable large employer, or ALE, members), the ALE members are aggregated for purposes of determining whether the group of employers is an ALE. However, each individual ALE member is generally responsible for its own employer shared responsibility payment.