What Is 4980H and How Does It Impact Employer Responsibilities?
Explore how 4980H affects employer duties, including compliance, penalties, and reporting requirements for managing full-time equivalents.
The Affordable Care Act (ACA) introduced mandates to increase access to health insurance, including Section 4980H, which requires certain employers to offer health coverage or face penalties. This provision aims to ensure workers have affordable healthcare options.
Who Is Subject to the Employer Mandate
The employer mandate under Section 4980H applies to Applicable Large Employers (ALEs), defined as employers with an average of at least 50 full-time employees, including full-time equivalents (FTEs), during the previous calendar year. This calculation determines whether an employer must offer health insurance coverage to their workforce.
A full-time employee works at least 30 hours per week or 130 hours per month. FTEs are calculated by totaling the monthly hours worked by part-time employees and dividing by 120. Employers classified as ALEs must provide minimum essential coverage that is “affordable” and offers “minimum value” to at least 95% of their full-time employees and dependents. For 2024, the employee’s share of the premium for the lowest-cost self-only coverage cannot exceed 9.86% of household income.
Determining Full Time Equivalents
Employers must calculate FTEs to understand their obligations. This involves summing the hours worked by part-time employees in a month and dividing by 120. For instance, 1,200 hours worked by part-time employees in a month equals 10 FTEs.
Seasonal workers also factor into this calculation. If an employer’s workforce exceeds the 50 FTE threshold for 120 days or fewer in a year due to seasonal employees, they may not be classified as an ALE.
Penalty Structures
Penalties under Section 4980H are divided into two categories: the “A” penalty and the “B” penalty.
The “A” penalty applies when an ALE fails to offer minimum essential coverage to at least 95% of full-time employees and dependents. If one full-time employee receives a premium tax credit for purchasing coverage through the Health Insurance Marketplace, the employer faces a penalty of $2,970 per full-time employee (excluding the first 30 employees) for 2024.
The “B” penalty is imposed when an ALE offers coverage that is not “affordable” or does not meet “minimum value” standards. If a full-time employee receives a premium tax credit, the employer incurs a penalty of $4,460 per affected employee for 2024.
Reporting Obligations
ALEs must meet reporting obligations to comply with the ACA. The IRS requires employers to report the health coverage offered to their workforce using Forms 1094-C and 1095-C.
Form 1094-C is submitted to the IRS and summarizes the information provided in the individual employee statements. Each ALE must file one Form 1094-C annually. Form 1095-C is distributed to each full-time employee, detailing the coverage offered and whether it met affordability and minimum value standards.
The deadline to furnish Form 1095-C to employees is typically in early March, with electronic submission of Form 1094-C to the IRS due by the end of March.
Recordkeeping Duties
Maintaining accurate records is essential for compliance with Section 4980H. Employers must retain documentation supporting their ALE classification, the health coverage offered, and employee eligibility for coverage.
Key records include payroll data, employee hours, health plan documents, and correspondence related to coverage offers or enrollment. Employers should also retain copies of Forms 1094-C and 1095-C, along with supporting documentation like affordability calculations or evidence of minimum value compliance. The IRS recommends retaining these records for at least three years.
Employers should implement systems to track employee classifications, particularly those with fluctuating hours near the full-time threshold, and ensure seasonal or variable-hour employees are accounted for accurately.
Payment Timelines
When penalties under Section 4980H are assessed, the IRS begins with issuing Letter 226J, which notifies employers of the proposed penalty and explains the calculation, including the months and employees triggering the penalty.
Employers have 30 days to respond to Letter 226J. During this time, they may accept the penalty or dispute it by providing additional documentation. If the penalty is disputed, the IRS reviews the response and issues Letter 227 with the outcome. If the penalty remains, employers must pay or arrange an installment agreement using IRS Form 9465.
Timely payment is critical to avoid interest or additional penalties. Employers should note that penalties under Section 4980H are not tax-deductible. Establishing a clear process for managing IRS correspondence helps ensure deadlines are met effectively.