Pay or Play Penalties increase for 2023
The IRS released the adjusted pay or play penalty amounts for 2023 under the Affordable Care Act. For calendar year 2023, the adjusted $2,000 penalty amount is $2,880 and the adjusted $3,000 penalty amount is $4,320.
Pay or Play Penalties
There are two potential pay or play penalties, based on whether the applicable large employer (ALE) offers health coverage to certain employees:
ALEs Not Offering Coverage: The ALE does not offer health coverage or offers coverage to fewer than 95% of its full-time employees (and their dependents), and at least one full-time employee receives a premium tax credit; or
ALEs Offering Coverage That Is Not Affordable Or Does Not Provide Minimum Value: The ALE offers health coverage to at least 95% of its full-time employees (and their dependents), but at least one full-time employee receives a premium tax credit, which may occur because the ALE did not offer coverage to that employee or because the coverage the ALE offered that employee was either unaffordable to the employee or did not provide minimum value.
How to Calculate the Penalty
ALEs Not Offering Coverage
For ALEs that do not offer coverage, the ALE owes a penalty equal to:
The number of full-time employees* the ALE employed for the calendar year (minus up to 30);
Multiplied by $2,000 (adjusted for inflation each year).
*Part-time employees and full-time equivalent employees are not counted for this purpose. In addition, certain full-time employees in a "limited non-assessment period" (for example, very generally, a full-time employee in a waiting period), are not counted for this purpose. See the definition of limited non-assessment period in § 54.4980H-1(26) of the regulations.
For an ALE offering coverage for some months but not others during the year, the penalty is computed separately for each month for which coverage was not offered. The penalty for the month equals the number of full-time employees for the month (minus up to 30) multiplied by 1/12 of $2,000 (as adjusted annually).
Example
ALE employs 100 full-time employees in each calendar month of 2022 and does not provide an employer-sponsored health plan (and no limited non-assessment periods apply). At least one of the ALE's full-time employees is certified to receive a premium tax credit. ALE is subject to a penalty equal to 70 x $2,750 (100 full-time employees minus 30, and then multiplied by $2,750, which is the adjusted penalty amount for 2022) = $192,500 for 2022.
ALEs Offering Coverage That Is Not Affordable Or Does Not Provide Minimum Value
An ALE that offers affordable coverage that provides minimum value to less than 100% of full-time employees may nevertheless owe a penalty if an employee who is not offered coverage receives a premium tax credit or cost-sharing reduction.
For an ALE that offers coverage to at least 95% of its full-time employees and their dependents, but has one or more full-time employees who are certified to receive a premium tax credit, the penalty is computed separately for each month, as follows:
Number of full-time employees* receiving a premium tax credit or cost-sharing reduction;
Multiplied by $3,000 (adjusted for inflation each year).
However, under this scenario, the penalty is capped at the amount that would be owed if the ALE did not offer coverage, to ensure that an ALE offering coverage will never pay more than it would owe if it did not offer coverage.
*Part-time employees and full-time equivalent employees are not counted for this purpose. In addition, certain full-time employees in a "limited non-assessment period" (for example, very generally, a full-time employee in a waiting period), are not counted for this purpose (refer to the definition of limited non-assessment period in § 54.4980H-1(26) of the regulations for more details). Employees who were offered the opportunity to enroll in coverage that met one or more of the affordability safe harbors are also not counted for this purpose.
Example
ALE employs 100 full-time employees in each calendar month of 2022 and provides an employer-sponsored health plan to these employees (no limited non-assessment periods apply). Five full-time employees of ALE are certified to receive a premium tax credit during each month in 2022 because the coverage offered was unaffordable. ALE is subject to a penalty equal to 5 x 1/12 of $4,120 (which is the adjusted penalty amount for 2020) = ($1,716.67) x 12 months = $20,600 for 2022.
Penalty Calculator
The penalty calculator may be used to calculate the potential amount of a penalty under the pay or play rules. The employer manually enters data on the number of full-time employees and employees receiving a premium tax credit or cost-sharing reduction for a month, and the spreadsheet calculates the estimated penalty for the month.