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The 95 Percent Test: Gearing up for Another Round of Employer Shared Responsibility Penalties

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Late last year, the Internal Revenue Service (the “Service”) began enforcing penalties with respect to failures to comply with the employer shared responsibility provisions of Section 4980H of the Internal Revenue Code.  In the coming months, the Service is expected to begin assessing penalties with respect to such failures occurring in calendar year 2016.  These penalties are of two varieties:

  1. Section 4980H(a) penalties are assessed for any month in which an applicable large employer (“ALE”) does not offer minimum essential coverage to substantially all (95% for 2016 and future years) of its full-time employees and their dependents and at least one full-time employee receives a premium tax credit.  The Section 4980H(a) penalty applies to all full-time employees, not just those who were not offered minimum essential coverage or who received a premium tax credit.  Accordingly, this penalty can be sizable.
  2. Section 4980H(b) penalties are assessed for any month in which an ALE offers minimum essential coverage to substantially all of its full-time employees and their dependents, but such coverage is unaffordable or does not provide minimum value and one or more full-time employees receive a premium tax credit.  The Section 4980H(b) penalty is assessed only with respect to employees who receive a premium tax credit.

If the Service believes that an ALE is liable for a Section 4980H penalty, the Service will propose a penalty assessment in a Letter 226J.  In general, an ALE has 30 days from receipt of a Letter 226J to respond to the penalty assessment.  Although the Service permits certain limited extensions of this period, it is important to act quickly.  Accordingly, ALEs that receive a Letter 226J may want to consult with legal counsel and/or with any third party vendor that assisted the ALE in preparing the forms associated with health care coverage reporting (Forms 1094-C and 1095-C).

It is important to remember that the Section 4980H(a) penalty is triggered (in 2016 and future years) by a failure to offer minimum essential coverage to 95% of full-time employees and their dependents.  This requirement is more stringent than the 70% test imposed with respect to coverage offered in calendar year 2015.  We expect that this more challenging test increases the likelihood of ALEs receiving Letters 226J.

For more information about Section 4980H penalties, including an explanation of how to calculate each penalty, please see our “Health Care Reform Employer Shared Responsibility Penalties: A Checklist for Employers.”