Understanding ACA Penalty A and Penalty B

Once an employer becomes an Applicable Large Employer, two different IRS penalties may apply.

Although they're often discussed together, Penalty A and Penalty B are very different.

Understanding both is essential to building a compliant health plan.

Penalty A — The "Sledgehammer"

Penalty A applies when an ALE:

• Does not offer Minimum Essential Coverage (MEC) to at least 95% of full-time employees and their dependents, and
• At least one full-time employee receives a premium tax credit through the Health Insurance Marketplace.

Because the penalty is generally calculated across almost the employer's entire full-time workforce (less the statutory reduction), it can become extremely expensive.

That's why Penalty A is commonly called the "Sledgehammer Penalty."

Penalty B — The "Tack Hammer"

Penalty B applies when an employer offers coverage, but:

• The coverage is not affordable, or
• The coverage does not provide Minimum Value (MV), and
• One or more full-time employees receives a premium tax credit through the Marketplace.

Unlike Penalty A, Penalty B applies only to employees who receive a subsidy, making it much more targeted.

How Is Affordability Determined?

Many employers assume affordability is based on what an employee believes they can afford.

It isn't.

The Affordable Care Act compares the employee's required contribution for employee-only coverage (not family coverage) to an affordability percentage established annually by the IRS.

Because employers generally do not know an employee's household income, the IRS permits employers to use one of three safe harbors:

W-2 Safe Harbor

Affordability is measured using the employee's annual Form W-2 wages.

Rate of Pay Safe Harbor

Affordability is based on the employee's hourly rate of pay (or monthly salary for salaried employees).

Federal Poverty Level (FPL) Safe Harbor

The employer sets employee contributions based on the Federal Poverty Level guidelines published by the IRS.

If the employee contribution for employee-only coverage does not exceed the applicable affordability percentage under one of these safe harbors, the employer generally satisfies the ACA affordability requirement.

Why Affordability Matters

Many employers successfully avoid Penalty A by offering MEC coverage.

However, they overlook affordability.

If the Minimum Value plan offered to employees is not affordable, and a full-time employee instead qualifies for subsidized Marketplace coverage, the employer may still owe Penalty B.

That's why employers should evaluate both:

• Whether MEC is offered to at least 95% of full-time employees, and
• Whether at least one offered plan is affordable and provides Minimum Value.

Affordability should be reviewed every year because the IRS updates the affordability percentage annually.

Common Employer Mistakes

• Believing any health plan satisfies ACA requirements.
• Confusing MEC with Minimum Value.
• Never performing affordability testing.
• Failing to document offers of coverage.
• Missing Forms 1094-C and 1095-C filing deadlines.

Documentation Matters

Every ALE should maintain:

• Employee enrollment forms
• Signed waivers
• Offer-of-coverage records
• Affordability calculations
• Forms 1094-C and 1095-C

Good documentation is often the employer's strongest defense during an IRS review.

The Bottom Line

Penalty A is about offering coverage.

Penalty B is about offering affordable coverage that provides Minimum Value.

Understanding both penalties is the foundation of every successful ACA compliance strategy.