Taxes and Penalties in the 2012 Affordable Health Care Act

TaxConnections Picture - Healthcare and Money

The 2012 “Affordable Health Care Act” (Obama Care) [The Act] contains many provisions for penalties and additional taxes for businesses that do not provide health care coverage for their employees. Health care coverage is mandated for businesses employing a certain number of “full-time” employees. It also imposes penalties on individuals who do not have health care coverage. Businesses have until January 1, 2015 to comply and individuals until March 31, 2014. There is legislation pending in Congress to extend the individual mandate until January 2015.

This article will discuss the Act’s ramifications, particularly for small businesses, in determining if they are required to cover employees with health insurance and penalties for failure to do so. A Even businesses that provide insurance today may get caught up under the mandate because they must offer coverage that meets the >minimum= requirements {Michael D. Tanner, “No [Obama Care]: It will Make It Harder For Small Firms to Grow”, The Wall Street Journal, August 19, 2013}. There are still uncertainties regarding implementation of the Act because the IRS has not released final regulations.

Penalties (Taxes) on Large Businesses

Under the ACT, starting January 1, 2015, large businesses (employing 50 or more) are required to purchase health coverage for all full-time employees (more than 30 hours per week or, if the employer elects, at least 130 hours of service per month) [Prop. Regs. Sec 54.4980H-(a)(18)]. The 50 employee requirement is determined by the sum of all full-time employees and full-time equivalents for each calendar month in the preceding year, divided by 12. If the result is 50 or more, the employer is a large employer for the calendar year unless a seasonal worker exception applies. [Prop. Regs Sec. 498H(c)(2)]. If employees are paid by the hour, actual hours of service are used. For non-hourly employees, the employer must count actual hours or apply an equivalent of eight hours daily or 40 hours per week, provided the method used does not substantially understate the employees hours of service that would cause the employees not to be treated as full time [Prop. Regs. Sec 54.4980H-(3)(b)]. To determine the 30 hours per week requirement, individually, but, in combination, are counted as full-time solely to determine if an employer is a large employer. The number of full-time employees is determined by calculating the average number of monthly hours of service by all employees who worked less than full-time (capped at 130 hours for any single employee) divided by 12 [Prop. Regs. Sec 54.4980H-(2)(c)]. The employer is considered to offer health care coverage to full-time employees and their dependents for a calendar month if, for that month, it offers such coverage to at least 95% of its full-time employees and their dependents [Prop. Regs. Sec 54.4980H-(4)(a)]. The previous information was taken from “Prop. Regs. Clarify ‘Play or Pay’ Rules of the Affordable Care Act”, The Tax Adviser, May 2013.

Employers not providing health care coverage

[The Kiplinger Letter: Forecasts For Management Decision Making, May 17, 2013]

These employers will be subject to the tax, which is the lesser of:

(a) $3,000 times the number of full-time employees, in excess of 30, who buy a federally subsidized policy through a state exchange and receive a premium assistance tax credit. To avoid this tax, the employer must pay at least 60% of benefit costs. The share of the premium paid by a worker can’t be more than 9.5% of earned income, based on the prior year’s W-2. Since large employers are ineligible to buy group coverage on an exchange for two or three years, they should buy coverage through their present insurance brokers.

(b) $2,000 times the number of full-time employees in excess of 30, who gets a subsidy at a state exchange. The tax applies if even one full-time employee gets a subsidy at a state exchange. Since the tax is really a penalty, it is not tax deductible.

Starting in 2015, plans that favor ”highly paid” workers (as defined by IRS regs.) will result in a penalty of $100 per worker, once the penalty phases in. At this time, the rules are not finalized. Firms that offer insurance plans must pay by July 31, 2015 an annual fee of $1 for each of the average number of employees covered in 2012. The fee continues through 2018. A fee of $63 per employee will be levied at the end of 2015 on all firms that offer insurance. The first payment must be made in 2016.

Self-employed persons can purchase insurance through a state exchange and may be eligible for a government subsidy (credit) to help buy it. This is available for those with incomes up to 400% of the U.S. poverty level (presently, $45,900 for singles and $94,200 for a family of four).

Employers are required to report to the IRS the names, and social security number of all employees and indicate whether they are covered by health insurance.

Penalties on Individuals

Individuals who do not buy health insurance, have to pay a penalty of $95 for 2014 ($47.50 for each family member under 18) with a $285 ceiling. The penalty increases to $325 in 2015 and to the greater of 2 2% of AGI or $695 in 2016. The income -based penalty is 1% of the excess of the taxpayers household AGI that exceeds the minimum level of income required to file a tax return. The tax is reduced proportionately for any months that the taxpayer had coverage. Both levels are expected to be significantly higher in 2015 and 2016, but the tax can’t exceed the cost of a “bronze-level” exchange plan. The tax is paid annually on form 1040. This means that any tax for 2014 will not be paid until the taxpayer files his tax return in 2015 [The Kiplinger Tax Letter, September 13, 2013].

This penalty will be enforced by requiring taxpayers, starting with the 2014 tax year, to indicate on their tax return whether they have purchased health insurance. If the penalty is imposed and is not paid, the taxpayer will likely get letters from the IRS asking for payment. But, the Act states the IRS cannot file a lien or levy against a person’s assets. It also can’t charge interest on the unpaid balance of the tax [The Kiplinger Tax Letter, September 13, 2013]. At this time, no IRS announcement has been made regarding how they will assess the penalty if a person does not file a tax return.

Tax on High-Cost Insurance Plans

Starting in 2018, there will be a 40% excise tax levied on insurance companies when insurance premiums exceed certain amounts (still to be announced by the IRS). The new tax is also levied on employers if they provide self-funded plans. The tax applies to the extent that the annual premiums exceed $10,200 for single coverage and $27,500 for family coverage [Intuit Accountants News Central, April 26, 2013]. The Obama administration recently issued a regulation exempting unions and big business from this penalty on self-administered plans

Subsidies (Tax Credits) for Small Employers

The credit percentage is 35% from 2010 through 2013 and 50% after 2013. The percentage is multiplied by the employer’s non-elective contributions toward the employee’s health insurance premiums. The credit phases out as the size of the business and the average wage increases. To qualify for the credit, the small business must contribute at least one-half of the cost of the premium and employ no more than 25 annual full-time equivalent employees and their wages cannot average more than $50,000. The full credit is available to a business with 10 or fewer full-time employees whose wages average less than $25,000. The credit has been available since 2010.

Starting in 2014, the credit will be available only if the business purchases health insurance through a state exchange and will be available for two years. There is no limit on the number of years that a business can take the credit in years before 2014 [Intuit Accountants News Central, April 26, 2013].

Subsidies (Tax Credits) for Individuals

[Intuit Accountants News Central, April 26, 2013].

Starting in 2014, people who buy health insurance through an exchange may be eligible for the premium assistance credit. The credit is refundable and is payable directly to the insurer. The individual then pays the difference between the total premium and the credit. If a person is employed, the payment can be made through a payroll deduction. Direct subsidies are also available but no information has been released as to how this will be accomplished.

Determining Eligibility for the Subsidy

Household income and family size must fall within the federal poverty line (presently, $45,900 for singles and $94,200 for a family of four). Subsidies are available up to 400% of the federal poverty line. If a family has income up to 133% of the federal poverty line, they need to spend 2% of their income for premiums, with the balance being subsidized by the government. As income increases, the amount of the subsidy decreases.


John is single and earns $45,000 per year, which is about 300% of the federal poverty line. John needs to devote 9.5% of his income ($4.280) towards health insurance. If the average annual premium is $5,160, the government will subsidize the balance of $885. This results in John paying 83% of the premium.

Exemptions from the Individual Penalty

• Coverage is too expensive

• Individuals without coverage for less than three months

• People who can show that a hardship forced them to go without insurance

• Members of religious groups opposed to private or public insurance

• American Indians

• Aliens not lawfully present in the U.S.

• Incarcerated individuals

• Individuals whose lowest cost option exceed 8% of household AGI

• employees who are ineligible for employer coverage if the cost of a basic “bronze” level plan in an exchange, less any federal credit for buying insurance, exceeds 8% of the household AGI

• Members of a household if they do not have enough income to file a tax return

[Intuit Accountants News Central, April 26, 2013].


The Act will create hardships, particularly for small businesses .The mandate that employers provide health care insurance for all employees who work more than 30 hours a week, or face penalties, increases the cost of doing business without providing any benefit and will result in higher prices to consumers and fewer full-time workers or even cause employees to be laid off. It significantly raises the cost to small businesses that aspire to become large ones. If a firm employs 49 employees (considered a small business) and hires one more employee, this will trigger a $2,000 penalty for every worker after the first 30.

According to the Gallup poll, 41% of small businesses have already held off on plans to hire new employees, and 38% said they have pulled back on plans to expand in other ways. Worse, 11% indicate that they have laid off workers or cut back their hours. While current plans are grandfathered, businesses must come into compliance if they make any changes to those plans, such as changing deductibles. Moreover, noncompliant plans are closed from adding new clients. Eventually, most businesses will be forced to change to compliant plans.

[Michael D. Tanner, “No [Obama Care] : It will Make It Harder For Small Firms to Grow”, The Wall Street Journal, August 19, 2013].

Recently, some large companies (IBM, Honeywell, Cleveland Clinic, Home Depot. Walgreens, Lowes, IBM, Trader Joes, GE-there will most likely be many others) indicated they will no longer purchase health care insurance for retirees and other select full-time employees, but will instead pay them a stipend to purchase health care insurance on the state exchanges [Melissa Francis, Money With Melissa Francis, The Fox Business Network, September 18, 2013]. It remains to be seen what the long-term ramifications will be for businesses and individuals resulting from the Act. One thing is certain: it will continue to create confusion, uncertainty and opposition.

In accordance with Circular 230 Disclosure

Dr. Goedde is a former college professor who taught income tax, auditing, personal finance, and financial accounting and has 25 years of experience preparing income tax returns and consulting. He published many accounting and tax articles in professional journals. He is presently retired and does tax return preparation and consulting. He also writes articles on various aspects of taxation. During tax season he works as a volunteer income tax return preparer for seniors and low income persons in the IRS’s VITA program.

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