Quick Guide to ACA Affordability, Penalty & Subsidy Calculations

Flex reports:

The U.S. Department of Health and Human Services (HHS) and the Internal Revenue Service (IRS) have jointly issued rules that define affordable coverage. Employers and employees still have several questions about how this affects penalty calculations and subsidy eligibility. The following offers some insight on these key issues:



“Failure to Offer” Penalty

Employers that have 50 or more full-time equivalent employees must offer group health insurance to their employees next year or pay a penalty. The penalty is $2,000 per full-time employee with an exemption for 30 employees.


For example, if an employer had 100 full-time employees the penalty would be applied to 70 employees, which would result in a $140,000 penalty. The penalty is pro-rated on a monthly basis for employers that offer coverage for only a portion of the year.

“Unaffordability” Penalty

Employers (with 50+ employees) that choose to offer health insurance coverage must then make sure it is considered affordable, or be faced with a different penalty. Coverage is considered affordable if the employee cost for self-only coverage is less than 9.5% of their compensation, as reported in Box 1 of their W-2 statement.


For example, an employee making $35,000 would have to be charged $277.08 or less per month ($35,000 x 9.5% = $3,325/12) for self-only coverage for it to be considered affordable.


The employer can charge additional premium for employees that elect to cover dependents. There is actually no contribution requirement that the employer must make towards dependent coverage, and this is not taken into account to determine if the employer is offering affordable coverage.


If the coverage is considered unaffordable the employer may be subject to a penalty. The penalty is $3,000 per employee, and it is only applicable to employees in which coverage is considered unaffordable, and that apply for coverage through a public exchange and qualify for a premium tax subsidy. The penalty would also be pro-rated on a monthly basis if the employer provided affordable coverage for only a portion of the year.



Premium and Cost Sharing Subsidies

  • If coverage is not offered by the employer or is considered to be unaffordableand household income is at or below 400% of the Federal Poverty Level (FPL) the employee and/or dependents can apply through a public exchange to receive premium and cost sharing subsidies. Based on the 2013 FPL this would include a single household earning up to $45,960 or a family of four earning up to $94,200. The subsidy amounts will vary based on a scale relative to the FPL.
  • If coverage offered by the employer is considered to be affordable it will eliminate subsidy eligibility to that employee, as well as any dependents in which coverage is made available. The subsidy eligibility would be eliminated even if the dependents do not elect to be covered by the employer plan. The guidance indicates coverage must generally be extended to all children, but it does not have to be extended to spouses. Several employers are evaluating whether to extend coverage to spouses next year, as it may eliminate their subsidy eligibility.


Penalty for Being without Health Insurance

Employees and individuals that choose to go without insurance next year will be subject to a penalty. In 2014 the penalty will be $95 per adult and $47.50 per child (up to $285 for a family) or 1% of family income, whichever is greater. By 2016 it will increase to $695 per adult and $347.50 per child (up to $2,085 for a family) or 2.5% of family income, whichever is greater.


There are some exceptions to the penalty which include things such as religious objections and financial hardships. Also, those people that would have to pay more than 8% of their household income after employer contributions or federal subsidies will be exempt from any penalties.