Summary of Potential Employer Penalties
Under the Patient Protection and Affordable
Care Act (PPACA)
Janemarie Mulvey
Specialist in Health Care Financing
August 9, 2011
Congressional Research Service
7-5700
www.crs.gov
R41159
CRS Report for Congress
Pr
epared for Members and Committees of Congress

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Summary of Potential Employer Penalties Under PPACA

his report describes and illustrates the penalties, when applicable beginning in 2014, to
employers under the new health insurance reform law—specifically, in Section 1513 and
T Section 10106 of the Patient Protection and Affordable Care Act (PPACA, P.L. 111-148),
as amended by Section 1003 of the Health Care and Education Reconciliation Act of 2010 (P.L.
111-152). Hereinafter, PPACA will refer to PPACA as amended by the reconciliation act.
PPACA does not explicitly mandate an employer offer employees acceptable health insurance.
However, certain employers with at least 50 full-time equivalent employees will face penalties,
beginning in 2014, if one or more of their full-time employees obtains a premium credit through
an exchange.1 As described in greater detail below, an individual may be eligible for a premium
credit either because the employer does not offer coverage or the employer offers coverage that is
either not “affordable” or does not provide “minimum value.”
Application Only to “Large Employers”
Only a large employer may be subject to penalties regarding employer-sponsored health
insurance. A “large employer” is an employer who employed an average of at least 50 full-time
equivalent employees on business days during the preceding calendar year.2 As shown in Table 1,
in order to determine whether an employer is a “large employer,” both full-time and part-time
employees are included in the calculation. “Full-time employees” are those working an average of
at least 30 hours per week.3 The number of full-time employees excludes those full-time seasonal
employees who work for up to 120 days during the year.4 The hours worked by part-time
employees (i.e., those working less than 30 hours per week) are included in the calculation of a
large employer, on a monthly basis, by taking their total number of monthly hours worked
divided by 120.
For example, a firm has 35 full-time employees (30+ hours). In addition, the firm has 20 part-
time employees who all work 24 hours per week (96 hours per month). These part-time
employees’ hours would be treated as equivalent to 16 full-time employees, based on the
following calculation:
20 employees x 96 hours / 120 = 1920 / 120 = 16

1 For more information about exchanges under PPACA, see CRS Report R40942, Private Health Insurance Provisions
in the Patient Protection and Affordable Care Act (PPACA). For more information on premium credits in particular,
see CRS Report R41137, Health Insurance Premium Credits in the Patient Protection and Affordable Care Act
(PPACA).
2 Internal Revenue Code (IRC) §4980H(c)(2), as amended by §1513 and §10106 of PPACA, and as amended and
renumbered by §1003 of P.L. 111-152. The statutes use the term full-time employee in the definition of large employer,
but then expand on the definition of large employer to include both full- and part-time workers. Additionally, an
employer who is part of a group of employers treated as a single employer under §414 (b), (c), (m), or (o) of the IRC
(including employees of a controlled group of corporations, employees of partnerships, proprietorships, etc., which are
under common control, and employees of an affiliated service group) are treated as a single employer. For employers
not in existence throughout the preceding calendar year, the determination of large employer is based on the average
number of employees a firm reasonably expected to employ on business days in the current calendar year. Any
reference to an employer includes a reference to any predecessor of that employer.
3 IRC §4980H(c)(4).
4 IRC §4980H(c)(2)(B). In addition, an employer will not be considered a large employer if its number of full-time
employees exceeded 50 for 120 days or less.
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Thus, in this example, the firm would be considered a “large employer,” based on a total full-time
equivalent count of 51—that is, 35 full-time employees plus 16 full-time equivalents based on
part-time hours.
Table 1. Determination and Potential Application of Employer Penalty for
Categories of Employees
Once an employer is determined
to be a “large employer,” could
How is this category of employee
the employer be subject to a
used to determine “large
penalty if this type of employee
Employee category
employer”?
received a premium credit?
Ful -time
Counted as one employee, based on a
Yes
30-hour or more work week
Part-time
Prorated (calculated by taking the
No
hours worked by part-time employees
in a month divided by 120)
Seasonal
Not counted, for those working up to
Yes, for the month in which a
120 days in a year
seasonal worker is full time
Temporary Agency
Generally, counted as working for the
Yes, for those counted as working for
temporary agency (except for those
the temporary agency
workers who are independent
contractors )
Source: CRS analysis of P.L. 111-148 and P.L. 111-152.
Potential Tax Penalties in 2014 on Large Employers
Regardless of whether or not a large employer offers coverage, it will be potentially liable for a
penalty beginning in 2014 only if at least one of its full-time employees obtains coverage through
an exchange and receives a premium credit (for purposes of determining the penalty, a “full-time
employee” includes only those individuals working 30 hours per week or more). As shown in
Table 1, part-time workers are not included in penalty calculations (even though they are
included in the determination of a “large employer”). An employer will not pay a penalty for any
part-time worker, even if that part-time employee receives a premium credit. Conversely, seasonal
workers are not included in the determination of large employer. However, if an employer is
determined to be a large employer, without counting its seasonal workers, it could still potentially
face a penalty for each month that a full-time seasonal worker received a premium credit for
exchange coverage.
Beginning in 2014, individuals who are not offered employer-sponsored coverage and who are
not eligible for Medicaid or other programs may be eligible for premium credits for coverage
through an exchange.5 These individuals will generally have income between 138% and 400% of
the federal poverty level (FPL).
Individuals who are offered employer-sponsored coverage can only obtain premium credits for
exchange coverage if, in addition to the other criteria above, they also are not enrolled in their

5 IRC §36B(c)(2)(B) and IRC §5000A(f).
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employer’s coverage,6 and their employer’s coverage meets either of the following criteria: the
individual’s required contribution toward the plan premium for self-only coverage exceeds 9.5%
of their household income, or the plan pays for less than 60%, on average, of covered health care
expenses.7
Other PPACA provisions will also affect whether full-time employees obtain premium credits for
exchange coverage. For example, exchanges are required to have “screen and enroll” procedures
in place for all individuals who apply for premium credits.8 This means that individuals who
apply for premium credits must be screened for Medicaid and the State Children’s Health
Insurance Program (CHIP) and, if found eligible, are to be enrolled in those programs; exchange
premium credits will not be an option. This could affect whether any of an employer’s full-time
employees obtain premium credits in an exchange—and if so, how many.9
Penalty for Large Employers Not Offering Coverage
As previously mentioned, beginning in 2014, a large employer will be subject to a penalty if any
of its full-time employees receives a premium credit toward their exchange plan. In 2014, the
monthly penalty assessed to employers who do not offer coverage will be equal to the number of
full-time employees minus 30 multiplied by one-twelfth of $2,000 for any applicable month.
After 2014, the penalty payment amount would be indexed by the premium adjustment
percentage for the calendar year.10
Penalty for Large Employers Offering Coverage
As previously mentioned, employers who do offer health coverage will not be treated as meeting
the employer requirements if at least one full-time employee obtains a premium credit in an
exchange plan because, in addition to meeting the other eligibility criteria for credits, the
employee’s required contribution for self-only coverage exceeds 9.5% of the employee’s
household income or if the plan offered by the employer pays for less than 60% of covered
expenses. According to the Congressional Budget Office (CBO), about 1 million individuals per
year will enroll in an exchange plan and receive a credit because their employer’s plan was
unaffordable.11

6 IRC §36B(c)(2)(C)(iii).
7 Under §1411(e) and (f) of PPACA, after a person applies for premium credits in an exchange, the Secretary will
notify the exchange whether the person is eligible because the enrollee’s (or related individual’s) employer does not
provide minimum essential coverage or the coverage is unaffordable. The exchange must notify employers and inform
them that they may be liable for a penalty. The Secretary must establish a separate appeals process for these employers,
providing them with the opportunity to present information for review and must grant them access to the data used to
make the determination. This process is in addition to any rights of appeal the employer may have under the IRC.
8 §1311(d)(4)(F) of PPACA.
9 Originally, under PPACA §10108, all employers, regardless of the number of employees, who offered minimum
essential coverage and contributed toward that coverage, also had to provide “free choice vouchers” to employees who
met certain income and other conditions. Section 10108 was repealed by P.L. 112-10.
10 Per IRC §4980H(c)(5) and PPACA §1302(c)(4), the premium adjustment percentage is the national average premium
growth rate.
11 See the CBO March 20, 2010, estimate in a letter to the Honorable Nancy Pelosi, http://www.cbo.gov/ftpdocs/113xx/
doc11379/AmendReconProp.pdf. CBO did not publish an estimate of the number of people obtaining credits due to
employer plans not providing “minimum value,” but that number is probably small.
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In 2014, the monthly penalty assessed to the employer for each full-time employee who receives a
premium credit will be one-twelfth of $3,000 for any applicable month. However, the total
penalty for an employer would be limited to the total number of the firm’s full-time employees
minus 30, multiplied by one-twelfth of $2,000 for any applicable month. After 2014, the penalty
amounts would be indexed by the premium adjustment percentage for the calendar year.
Finally, those firms with more than 200 full-time employees that offer coverage must
automatically enroll new full-time employees in a plan (and continue enrollment of current
employees). Automatic enrollment programs will be required to include adequate notice and the
opportunity for an employee to opt out.12 Although most of the provisions discussed in this report
are not effective until 2014, this particular provision could be in effect as soon as the Secretary
promulgates regulations.
Examples
Table 2 shows four types of scenarios reflecting health insurance offerings of large employers
(columns A through D) and whether any employer penalty applies. In all the large-employer
scenarios, the employer size is assumed to remain constant, at 50 full-time employees, throughout
the year. The table provides examples of the penalty consequences based on whether the
employer offers coverage and whether an employee receive a premium credit.13 The four
scenarios are as follows:
Scenario A
The large employer does not offer coverage, but no full-time employees receive credits for
exchange coverage. No penalty would be assessed.
Scenario B
The large employer does not offer coverage, and one or more full-time employees receive credits
for exchange coverage. The annual penalty calculation is simply the number of full-time
employees minus 30, times $2,000. In this example (i.e., 50 full-time employees), the penalty
would not vary if only one employee or all 50 employees received the credit; the employer’s
annual penalty in 2014 would be (50-30) x $2,000, or $40,000.14

12 §1511 of PPACA.
13 Table 2 shows calculations for penalties on these employers in 2014 on an annual basis, rather than a monthly basis
as described above.
14 Because the calculation of “large employer” includes part-time workers, but the penalty is only calculated based on
full-time workers, not all large employers who have a full-time employee receiving a credit would actually pay a
penalty. This could occur because the first 30 workers are not counted. For example, an employer with 100 part-time
workers (15 hours per week) and 30 full-time workers (30+ hours per week) would be considered a large employer
with 80 full-time equivalent workers. Even if one or more workers received a premium credit, the penalty would only
be assessed against the number of full-time workers (30-30) x $2,000 = 0.
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Scenario C
The employer offers coverage and no full-time employees receive credits for exchange coverage.
No penalty would be assessed.
Scenario D
The employer offers coverage, but one or more full-time employees receive credits for exchange
coverage. The number of full-time employees receiving the credit is used in the penalty
calculation for an employer that offers coverage. The annual penalty is the lesser of the following:
• the number of full-time employees minus 30, multiplied by $2,000—or $40,000
for the employer with 50 full-time employees (i.e., 50 minus 30, multiplied by
$2,000), or
• the number of full-time employees who receive credits for exchange coverage,
multiplied by $3,000.
Although the penalties are assessed on a monthly basis (with the dollar amounts above then
divided by 12), this example uses annual amounts, assuming the number of affected employees is
the same throughout the year.
If the employer with 50 full-time employees had 10 full-time employees who received premium
credits, then the potential annual penalty on the employer for those individuals would be $30,000.
Because this is less than the overall limitation for this employer of $40,000, the employer penalty
in this example would be $30,000.
However, if the employer with 50 full-time employees had 30 full-time employees who received
premium credits, then the potential annual penalty on the employer for those individuals would be
$90,000. Because $90,000 exceeds this employer’s overall limitation of $40,000, the employer
penalty in this example would be limited to $40,000.15









15 See previous footnote, for example of when an employer might not pay a penalty, in relation to a full-time worker
receiving a premium credit.
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Table 2. Potential Annual Penalties Beginning in 2014 for Large Employers
Applies to For-profit and Nonprofit Organizations
Not a large
Large employer: 50 or more full-time equivalent employeesa
employer: Less
than 50 full-time
Does not offer coverage
Offers coverage
equivalent
A B
C
D
employeesa
No full-time
1 or more full-time
No full-time
1 or more full-time
employeesb receive employeesb receive
employeesb receive
employeesb receive
credits for
credits for
credits for exchange
credits for
exchange coveragec exchange coveragec
coveragec
exchange coveraged
No penalty
No penalty
Number of ful -time
No penalty
Lesser of:
employeesb minus 30
multiplied by $2,000
Number of full-time
employeesb minus 30,
(penalty is $0 if
multiplied by $2,000.
employer has 30 or
fewer full-time
Number of full-time
employees)
employeesb who
receive credits for
exchange coverage,
multiplied by $3,000.
(Penalty is $0 if
employer has 30 or
fewer full-time
employees—because
penalty is based on the
lesser of the two
calculations)
Source: CRS analysis of P.L. 111-148 and P.L. 111-152.
Notes: Under the health insurance reform law, penalties will be assessed on a monthly basis (with the penalty
amounts divided by 12). To il ustrate annual amounts, this table assumes that the number of ful -time employees
and the number of those ful -time employees receiving credits through an exchange remains constant throughout
the year.
a. For purposes of determining whether an employer is a “large employer,” the number of ful -time employees
(i.e., those working 30 hours per week or more) is added to the number of ful -time equivalents (calculated
by taking the hours worked by part-time employees in a month divided by 120).
b. For purposes of applying the penalty amounts in this table, a full-time employee is an individual working 30
hours per week or more. Part-time workers or ful -time equivalents are not included.
c. Beginning in 2014, individuals who are not offered employer-sponsored coverage and who are not eligible
for Medicaid or other programs may be eligible for premium credits for coverage through an exchange.
Credit-eligible individuals wil generally have income between 138% and 400% of the federal poverty level
(FPL). The 138% FPL is 133% FPL plus an extra 5% FPL that PPACA requires to be disregarded from
individuals’ income when determining Medicaid eligibility.
d. Individuals who are offered employer-sponsored coverage can only obtain premium credits for exchange
coverage if they first meet the regular eligibility criteria for credits (e.g., they are not eligible for Medicaid or
other programs, and general y have income between 138% and 400% FPL) and meet the fol owing additional
criteria: they are not enrol ed in their employer’s coverage, and their employer’s coverage either (1)
requires the individual to contribute toward the self-only plan premium more than 9.5% of their household
income, or (2) the plan pays for less than 60%, on average, of covered health care expenses.
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Reporting and Other Requirements
The Secretary will issue regulations requiring employers to provide employees, at the time of
hiring (or for current employees no later than March 1, 2013), written notice concerning (1) the
existence of an exchange, including services and contact information; (2) the employee’s
potential eligibility for premium credits and cost-sharing subsidies if the employer plan’s share of
covered health care expenses is less than 60%; and (3) the employee’s potential loss of any
employer contribution if the employee purchases a plan through an exchange. Employers will be
subject to this requirement beginning March 1, 2013.16
Beginning in 2014, large employers will have certain reporting requirements with respect to their
full-time employees.17 As prescribed by the Secretary, they will have to provide a return including
the name, address, and employer identification number; a certification as to whether the employer
offers its full-time employees (and dependents) the opportunity to enroll in minimum essential
overage under an eligible employer-sponsored plan; the length an any waiting period; months
coverage was available; monthly premiums for the lowest-cost option; the employer plan’s share
of covered health care expenses; the number of full-time employees; and the name, address, and
tax identification number of each full-time employee. Additionally, an offering employer will
have to provide information about the plan for which the employer pays the largest portion of the
costs (and the amount for each enrollment category). The employer must also provide each full-
time employee with a written statement showing contact information for the person required to
make the above return, and the specific information included in the return for that individual. The
Secretary will work to provide coordination with other requirements, and an employer may enter
into an agreement with a health insurance issuer to provide necessary returns and statements.
Conclusion
Finally, Figure 1 displays the employer requirements that may result in an employer having to
pay a penalty for one or more months. Only large employers who have at least one full-time
worker receiving a premium credit through an exchange plan and employ more than 30 full-time
workers may pay a penalty, whether or not they provide health insurance.

16 PPACA §1512.
17 PPACA §1502.
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Figure 1. Determining if an Employer Will Pay a Penalty

Source: CRS analysis of P.L. 111-148 and P.L. 111-152.


Author Contact Information

Janemarie Mulvey

Specialist in Health Care Financing
jmulvey@crs.loc.gov, 7-6928

Acknowledgments
The author wishes to thank Hinda Chaikind and Chris L. Peterson, former CRS Specialist in Health Care
Financing, who co-authored the original report. Jonathan Chanin contributed to this report.

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