Medicare-Enrolled Employees' Impact on ACA's Employer Mandate Penalty

The IRS has explained how employees enrolled in Medicare affect an employers' liability under the Affordable Care Act's ("ACA's") employer shared responsibility penalties.

Under the ACA, employers with 50 or more full-time equivalent employees are subject to one of two penalties if they fail to comply with the ACA's employer shared responsibility provisions.

The first penalty applies if: (i) an employer fails to offer health care coverage to "substantially all" of its full-time employees; and (ii) a low-income, full-time employee receives a premium tax credit through a Marketplace. In those situations, the employer must pay an annual penalty of $2,000 (adjusted for inflation) multiplied by the number of full-time employees in excess of 30.

The other penalty applies in situations where: (i) an employer offers health care coverage to its full-time employees that is either "unaffordable" or does not provide "minimum value;" and (ii) a low-income, full-time employee receives a premium tax credit through an Exchange. In such situations, the employer must pay an annual penalty of $3,000 (adjusted for inflation) for each full-time employee who receives the premium tax credit. However, this penalty is capped at $2,000 multiplied by the number of full-time employees in excess of 30.

The IRS confirmed that for purposes of determining whether an employer is liable for the first penalty all full-time employees are counted, regardless of whether they are enrolled in Medicare or another type of coverage.

Conversely, the IRS noted that an employer is liable for the second penalty only for employees who enroll in Marketplace coverage and receive a premium tax credit subsidy. Because employees who are actually enrolled in Medicare (rather than merely eligible to enroll in Medicare) cannot receive the tax credit, they do not affect an employer's liability.