The Affordable Care Act (ACA) includes numerous reforms for group health plans and creates compliance obligations for employers and health plan sponsors. The ACA, for example, restricts health plans from imposing pre-existing condition exclusions and requires coverage for preventive care services without cost sharing. Some of the reforms for health plans apply to all health plans, while others apply only to non-grandfathered plans or to insured plans in the small group market.
Failing to comply with the ACA’s requirements can trigger substantial penalties for an employer. The potential consequences vary depending on the ACA requirement that is involved and the nature and extent of the violation. Employers should keep these consequences in mind as they continue to work on ACA compliance.
This Compliance Overview summarizes the penalties imposed under the Internal Revenue Code (Code) for violations of certain ACA provisions.
Group Health Plan Reforms
Code Section 4980D imposes an excise tax for a group health plan’s failure to comply with certain requirements, including the ACA’s reforms for group health plans. Failing to comply with a group health plan requirement may trigger an excise tax of
$100 per day with respect to each individual to whom the failure relates.
ACA Requirements
The $100 per individual, per day excise tax may be triggered by a violation of any of the following ACA requirements for group health plans:
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ACA Requirement |
Affected Group Health Plans |
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Coverage for adult children up to age 26 |
Health plans offering dependent coverage |
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No lifetime or annual limits on the dollar value of essential health benefits (EHB) |
All health plans. Exceptions apply for integrated HRAs and FSAs offered under a cafeteria plan. These plans are not subject to the prohibition on annual limits. |
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No coverage rescissions, except in cases of fraud or intentional material misrepresentation |
All health plans |
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No pre-existing condition exclusions |
All health plans |
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Coverage of preventive health services without cost-sharing |
Non-grandfathered health plans (certain exceptions apply to the contraceptive coverage mandate) |
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Patient protections (designation of primary care provider, designation of pediatrician as primary care provider, patient access to obstetrical and gynecological care and improved access to emergency services) |
All health plans For plan years beginning before Jan. 1, 2022, the ACA’s patient protections did not apply to grandfathered plans. |
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Improved internal claims and appeals process, including external review requirements |
Non-grandfathered health plans |
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Uniform summary of benefits and coverage (SBC) requirement |
All health plans |
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No waiting periods in excess of 90 days |
All health plans |
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Nondiscrimination rules for fully insured health plans |
Non-grandfathered, fully insured health plans (effective date is delayed until guidance is released) |
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Limits on cost-sharing (out-of-pocket maximum for EHB) |
Non-grandfathered health plans |
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ACA Requirement |
Affected Group Health Plans |
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Coverage for approved clinical trials |
Non-grandfathered health plans |
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No discrimination based on health status (including rules for wellness programs) |
Non-grandfathered health plans. Final wellness plan regulations apply to both non-grandfathered and grandfathered health plans) |
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Comprehensive health insurance coverage (EHB requirement) |
Non-grandfathered insured health plans in the small group market |
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No discrimination against health care providers acting within the scope of license |
Non-grandfathered health plans |
Reporting and Paying the Tax
For health plans sponsored by a single employer, the tax is imposed on the employer sponsoring the plan. The excise tax does not apply to health plans sponsored by governmental employers, and it does not apply to health insurance issuers.
However, the excise tax does apply to health plans sponsored by churches.
Any applicable excise taxes must be reported on IRS Form 8928, “Return of Certain Excise Taxes under Chapter 43 of the Internal Revenue Code.” Instructions for Form 8928 are also available. An employer must file Form 8928 and pay the excise tax by the due date of the employer’s federal income tax return, without taking into account any extensions. Filers may obtain an automatic six-month extension of time to file Form 8928, but this filing extension does not extend the time to pay the excise taxes that are due.
Amount of Tax
The penalty for not complying with the ACA’s group health plan reforms is generally $100 per day, per individual, per violation, subject to the following minimum and maximum amounts:
If a compliance failure is discovered by the IRS on audit, the minimum excise tax is generally $2,500. However, if the violations are significant, the minimum excise tax increases to $15,000.
For single employer plans, the maximum excise tax for unintentional failures is the lesser of 10% of the aggregate amount paid by the employer during the preceding tax year for group health plan coverage or $500,000.
Exceptions
There are some exceptions to the excise tax for group health plan violations. The excise tax may not apply if the failure is not discovered when exercising reasonable diligence, or if it is due to reasonable cause and is corrected within 30 days after the entity knew (or in exercising reasonable diligence, should have known) that the failure existed. A failure is corrected if it is retroactively undone to the extent possible and the affected beneficiary is placed in a financial position as good as he or she would have been in if the failure had not occurred.
In addition, small employers with insured health plans may be exempt from the excise tax for certain failures if the violation was solely because of the health insurance coverage offered by the insurer. For this purpose, a small employer is an employer with an average of 50 or fewer employees on business days during the preceding calendar year.
Summary of Benefits and Coverage
The ACA establishes a penalty of up to $1,000 for each willful failure to provide the SBC on time. This maximum penalty amount is adjusted for inflation each year. For penalties assessed after Jan. 15, 2023 (with respect to violations occurring after Nov. 2, 2015), the maximum penalty amount is $1,362 per failure. In addition, failing to provide the SBC may also trigger an excise tax of $100 per day, per individual, as discussed above.
The ACA also requires health plans and issuers to provide at least 60 days’ advance notice of any material modifications to plan terms that take effect during a plan year and are not reflected in the most recently provided SBC. A willful failure to provide this 60-day advance notice may also trigger a $1,000 penalty (as adjusted for inflation) and an excise tax of $100 per day, per individual.
Employer Shared Responsibility Rules
The ACA’s employer shared responsibility rules are often referred to as the “pay or play” rules or the employer mandate. Under these rules, beginning in 2015, ALEs may face penalties if one or more of their full-time employees obtains a subsidy through an Exchange. An ALE is an employer that had, on average, at least 50 full-time employees, including full-time equivalents (FTEs), during the preceding calendar year. An individual may be eligible for a subsidy either because the ALE does not offer health plan coverage to the individual or offers coverage that is either not “affordable” or does not provide “minimum value” (MV).
The amount of the employer shared responsibility penalty generally depends on whether an ALE offers coverage to substantially all full-time employees (and their dependents). In general, “substantially all” means 95% of an employer’s full- time employees and dependents. However, a special transition rule phased in this requirement so that, for 2015 (and any calendar months during the 2015 plan year that fall in 2016), “substantially all” meant 70% of an ALE’s full-time employees and dependents.
Penalty for Not Offering Coverage to Substantially All Full-time Employees
Under these rules, an ALE will be subject to a penalty if any of its full-time employees receives a subsidy for an Exchange plan. The monthly penalty assessed on ALEs that do not offer coverage to substantially all full-time employees (and their dependents) is equal to the ALE’s number of full-time employees (minus 30) multiplied by 1/12 of $2,000 for any applicable month.
After 2014, the penalty dollar amount is indexed by the premium adjustment percentage for the calendar year($2,750 for 2022, $2,880 for 2023 and $2,970 for 2024).
Penalty for Offering Coverage That Does Not Meet ACA Standards
ALEs that do offer coverage to substantially all full-time employees and dependents may still be subject to penalties if at least one full-time employee obtains a subsidy for an Exchange plan because the ALE did not offer coverage to all full-time employees, or the ALE’s coverage is unaffordable or does not provide MV.
The monthly penalty assessed on an ALE for each full-time employee who receives a subsidy will be 1/12 of $3,000 for any applicable month. However, the total penalty for an employer would be limited to the penalty amount for not offering coverage to substantially all full-time employees. After 2014, the penalty dollar amount is indexed by the premium adjustment percentage for the calendar year ($4,120 for 2022, $4,320 for 2023 and $4,460 for 2024).
Penalties Related to Reporting Requirements
The Code also includes the following general penalties that apply for violations of reporting requirements, including those imposed under the ACA:
Failure to file correct information returns (under Code Section 6721); and Failure to furnish correct payee statements (under Code Section 6722).
However, penalties may be waived if the failure is due to reasonable cause and not to willful neglect. Penalties may be reduced if the reporting entity corrects the failure within a certain period of time.
Also, lower annual maximums apply for entities that have average annual gross receipts of up to $5 million for the three most recent taxable years.
For returns due in 2023 and 2024 the adjusted penalty amounts are:
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Annual Maximum for Employers Penalty Type Per Violation Annual Maximum with ≤$5 Million in Gross Receipts |
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For Returns Due in: |
2024 |
2023 |
2024 |
2023 |
2024 |
2023 |
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General |
$310 |
$290 |
$3,783,000 |
$3,532,500 |
$1,261,000 |
$1,177,500 |
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Corrected within 30 |
$60 |
$50 |
$630,500 |
$588,500 |
$220,500 |
$206,000 |
|
days |
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Corrected after 30 |
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days, but before Aug. 1 |
$120 |
$110 |
$1,891,500 |
$1,766,000 |
$630,500 |
$588,500 |
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Intentional disregard* |
$630 |
$580 |
N/A |
None |
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*For failures due to intentional disregard of the filing requirement, the penalty is equal to the greater of either the listed penalty amount or 10% of the aggregate amount of the items required to be reported correctly.
Form W-2 Reporting—Aggregate Cost of Health Care
The ACA requires employers to report the aggregate cost of employer-sponsored group health plan coverage on their employees’ Forms W-2. Until the IRS issues further guidance, this reporting requirement is optional for small employers (those that file fewer than 250 Forms W-2). Beginning in 2012, the IRS made the reporting requirement mandatory for large employers. Thus, the W-2 reporting requirement is currently mandatory for large employers, but optional for small employers.
Violations of the ACA’s W-2 reporting requirement are subject to the existing rules on filing Forms W-2. See the penalty amounts under Sections 6721 and 6722 (described above) for employers that fail to comply with the W-2 reporting requirement. There are some exceptions to the Form W-2 reporting penalties. For example, a penalty will not apply if the employer can show that the failure was due to reasonable cause and not to willful neglect. In general, the employer must be able to show that the failure was due to an event beyond the employer’s control or due to significant mitigating factors, and the employer acted in a responsible manner and took steps to avoid the failure.
Employer Reporting—Code Sections 6055 & 6056
The ACA created reporting requirements under Code Sections 6055 and 6056. Under these reporting rules, certain employers must provide information to the IRS about the health plan coverage they offer (or do not offer) to their employees. Related statements must also be provided to employees. These reporting requirements apply to:
Employers with self-insured health plans (Code § 6055)—Every health insurance issuer, sponsor of a self-insured health plan, government agency that administers government-sponsored health insurance programs and any other entity that provides minimum essential coverage must file an annual return with the IRS, reporting information for each individual who is provided with this coverage. Related statements must also be provided to individuals.
ALEs with at least 50 full-time employees, including FTEs (Code § 6056)—ALEs subject to the ACA’s shared responsibility provisions must file a return with the IRS that reports the terms and conditions of the health care coverage provided to the employer’s full-time employees for the calendar year. Related statements must also be provided to employees.
In an effort to minimize any burdens and streamline the reporting process, the IRS allows reporting entities subject to both Sections 6055 and 6056 to use a single, combined form for reporting the information required under both requirements.
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IRS filing deadline is March 31 (Feb. 28 if filing on paper) of the year following the calendar year to which the return relates.
Employee statements must be provided by Jan. 31 of the year immediately following the calendar year to which the statements relate. However, the IRS has provided a 30- day automatic extension to the due date for furnishing ACA statements to individuals.
Filing extensions may be available in certain limited circumstances.
A reporting entity that fails to comply with the Section 6055 or Section 6056 reporting requirements may be subject to the general reporting penalties for failure to file correct information returns and failure to furnish correct payee statements under Code Sections 6721 and 6722 (see above).
PCORI Fees
Under the ACA, health insurance issuers and self-funded group health plans must pay fees to finance comparative effectiveness research. These research fees are called Patient-centered Outcomes Research Institute fees (PCORI fees). The fees were originally scheduled to apply for plan years ending on or after Oct. 1, 2012, but not for plan years ending on or after Oct. 1, 2019. However, a federal spending bill enacted at the end of 2019 extended the PCORI fees for an additional 10 years. As a result, these fees continue to apply for 2020-2029 fiscal years. The PCORI fees are due by July 31 of the calendar year following the plan year to which the fee applies.
For plan years ending on or after Oct. 1, 2022, and before Oct. 1, 2023, the fee amount is $3.00 (IRS Notice 2022-59). For plan years ending on or after Oct. 1, 2023, and before Oct. 1, 2024, the PCORI fee amount is $3.22 per covered life (IRS Notice 2023-70).
Since the PCORI fee is considered a tax that is reportable on IRS Form 720, any related penalty for failure to file a return or pay a tax likely applies. Under Code Section 6651, the penalty for failing to file a return or pay a tax is the full amount of the tax, plus possible excise taxes ranging from .5% to 25% of the original tax. However, there are exceptions to the excise taxes for failures that are due to reasonable cause and not due to willful neglect.
This Compliance Overview is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2014, 2016-2017, 2021-2023 Zywave, Inc. All rights reserved.