The Patient Protection and Affordable Care Act (PPACA) shared responsibility provisions require speculation about whether health care coverage will be affordable for an individual. Whether affordable coverage was available, whether an individual was eligible for a premium credit, and whether an employer was subject to penalties, cannot be determined until after the individual files a personal tax return. PPACA shared responsibility provisions address reconciliation of the speculation between the individual and federal agencies. Proposed regulations regarding premium tax credits and Notices 2011-36 and 2011-73 regarding shared responsibility for employers spotlight a missing linking: reconciliation with the employer.

PPACA Penalty for Large Employers Not Providing Affordable Coverage

PPACA provides that effective January 1, 2014, an individual may enroll in an exchange to obtain health care and apply for a premium tax credit to reduce required monthly premium contributions. Health and Human Services (HHS) must certify to the exchange whether the individual appears to be eligible for the credit, either because his employer does not provide minimum essential coverage, or because it appears that the employer provides minimum essential coverage that either fails to provide minimum value or is “unaffordable.” HHS must notify the employer that it may be assessed a monthly penalty with respect to the employee, and provide an appeal process for the employer, whereby HHS must provide access to data used to make the determination, and the employer will have an opportunity to present information for review. Coverage is “affordable” if the “required contribution” does not exceed 9.5% of household modified adjusted gross income for the tax year. The preamble to the proposed regulations provides that for purposes of the premium tax credit, “required contribution” is the employee-only premium.

The Affordability Certification is Speculative, Pending Employee Reconciliation

Whether the employee had available affordable coverage each month cannot be determined until after the tax year ends. Thus, the certification that HHS provides to the exchange, and the penalty notice that it provides to the employer, are speculative. PPACA provides that the exchanges are required to provide information to the IRS and to the taxpayer so that the advance payment and premium credit can be reconciled between the two of them. The proposed regulations require employees to reconcile the credits on their tax returns.

Let’s look at a possible scenario that will help illustrate this issue. Assume that an employee with unemployed household members applies in September 2013 for coverage effective January 1, 2014. The employer may not yet know what coverage it will provide in 2014, the cost, and whether that will change during the year. HHS must also speculate on the employee’s 2014 household modified adjusted gross income, which will not be known until as late as October 15, 2015 and could change substantially if the other household members become employed.

When will HHS compute the penalty against the employer and demand payment, given the potential two-year gap between when the speculation is made, and when the employee provides the Treasury with information to determine whether coverage was affordable? One possibility is that HHS would assess the penalties after the employee provides its reconciliation to the Treasury.

However, PPACA provides that HHS may provide for the payment on an annual, monthly, or other periodic basis, and requires a process for repayment, with interest, of overpaid penalties. This suggests that penalties will be speculative. Further, the Notice presumes that the burden to compute affordability and penalties after the tax year ends is on the employer, and that the employer will not have the necessary information for this computation.

The Missing Link: Reconciliation with the Employer

These presumptions spotlight a missing link in shared responsibility: the agencies’ and employees’ reconciliation with the employer.. A speculative penalty assessment against the employer would be made by HHS, and any subsequent data sharing and reconciling is limited to the exchange, Treasury/IRS, and taxpayer. There is no process by which to reconcile and substantiate that the employer was actually responsible for any penalties. Sharing responsibility requires sharing data.

Nor is there a process by which to demonstrate that an employee receiving a contribution subsidy in an employer plan in order to ensure that coverage was “affordable” was actually entitled to that subsidy.

Proposed Safe Harbor Increases Penalties and Contribution Subsidies

Under a proposed safe harbor, an employer can substitute employees’ Form W-2, Box-1 wages, computed after the end of the year, for household modified adjusted gross income for purposes of determining whether it satisfied the affordability requirement for an employee who purchased coverage on an exchange with a credit. But the percentage is not adjusted– it is still 9.5%. This may be simpler than reviewing the employee’s tax credit reconciliation, but the employer will obviously pay more penalties.

The guidance also proposes that an employer use the safe harbor prospectively, to structure the plan design and operation so that the employee contribution for individual coverage would not exceed 9.5% of the employee’s Box 1 wages for that year. Employers would be permitted to make “reasonable and necessary adjustments for pay periods” so that the employee contribution does not exceed 9.5% of Box 1 wages. This requires a reconciliation process, comparing year-to-date wages to year-to-date contributions. This reconciliation is a circular computation, because Box 1 consists of wages reduced by the amount of premiums paid by the employee, and other items. If the employer is providing a contribution subsidy to ensure that the employee contribution does not exceed 9.5% of Box 1, it would seemingly have to do this reconciliation every pay period to prevent underpayment or overpayment of subsidies. Again, this may be simpler than reviewing the employee’s tax credit reconciliation, but the employer will pay more subsidies.

Employer Reconciliation Questions

Given that PPACA and the guidance issued thus far do not address the missing link of reconciliation with the employer, we have the following questions:

  • When and how will an employer learn that an employee actually bought coverage on an exchange, and learn when the employee stops purchasing coverage?
  • For employees purchasing coverage on an exchange, when and how does an employer receive the employee’s reconciliation with household modified adjusted gross income, demonstrating that the employee qualified for the credit?
  • When and how does the penalty assessment end?
  • As to both employees purchasing coverage on an exchange and employees receiving a premium subsidy within the employer’s plan, when and how will an employer learn that the speculation about the household modified adjusted gross income no longer supports a presumption of unaffordability (e.g., if a household member becomes employed)?
  • What procedures will be in place to prevent an employer’s substantial overpayment of contribution subsidies or penalties, and how will employers recoup these amounts?
  • If penalties are assessed based on speculation, what due process will be given to employers to receive the facts establishing that a penalty was actually due, and to appeal any penalties assessed?


The employer cost of “shared responsibility” depends in part on how these employer reconciliation and safe harbors issues are resolved. The agencies have requested comments on a number of items, including alternative safe harbors. If you would like to comment, comments referencing Notice 2011-73 may be submitted via email to, by December 13, 2011.