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Nov 26

A Breakdown of the Healthcare Penalty for Individual & Employers

By Ryan Webber

On March 23, 2010 the Affordable Care Act was signed into law by the President and transformed the way small businesses and individuals will be able to shop for, compare and purchase health insurance. The Act, which was upheld by the U.S. Supreme Court in June 2012, preserved the law’s “individual mandate” requiring most Americans to have health insurance by January 1, 2014 or pay a penalty.

The Affordable Care Act promotes employers with 2 – 50 employees to provide health insurance to its employees. However, employers with less than 50 employees are exempt from requirements to offer coverage. Nevertheless, most employees of exempt employers must still find insurance privately or use their State or Federal exchanges to find affordable health insurance for themselves. To avoid the penalty, employers with more than 50 full time employees must offer them a health insurance package privately that meets certain requirement standards (Essential Health Benefits) or pick a plan in their State or Federal exchanges.

While individuals are not required to have health insurance today, beginning on January 1, 2014 most individuals must have it or pay a penalty on their individual income tax return. The penalty would start at $95 a year ($47.50 per child under 18), or up to 1 percent of household income, whichever is greater, and rise to $695, or 2.5 percent of household income, by 2016. Household income is defined by the Internal Revenue Service (IRS) as a taxpayers modified adjusted gross income less exemptions. The amount the taxpayer is assessed cannot exceed the cost of a specified level of annual premiums offered by the exchanges.

This penalty will also be assessed on employers with more than 50 full time employees that do not offer health insurance. The penalty will be $3,000 per employee, but it is not to exceed $2,000 x (full time employees minus 30). For example, if an employer had 51 full time employees and did not offer coverage that met the requirements, the employer would have to pay a penalty of $2,000 X 21 = $42,000. However, the penalty will not be greater than the penalty that would apply if the employer offered no coverage at all. Only full-time employees (not full-time equivalents) are counted for purposes of calculating the penalty. After 2014, the penalty amount may be indexed.

As written, the law prohibits the IRS from seeking to put anybody in jail or seizing their property for simple refusal to pay this penalty. The law says specifically that taxpayers “shall not be subject to any criminal prosecution or penalty” for failure to pay. It also states that the IRS cannot file a tax lien (a legal claim against such things as homes, cars, wages and bank accounts) or a “levy” (seizure of property or bank accounts). Currently, the only means the IRS has of collecting the penalty is to essentially garnish tax refunds for people or entities that overpaid their taxes.

Please note that small business owners with fewer than 25 full-time equivalent employees, who pay an average wage of less than $50,000 a year, and who pay at least half of employee health insurance premiums are eligible for a tax credit. The tax credit will help these small businesses offset the cost of covering their employees. Currently, the tax credit is 35 percent of the cost of premiums. The credit increases to 50 percent in 2014. The credit phases out as firm size and average wage increases. The credit is capped based on the average health insurance premium in the area where the small business is located.