As promised by the Centers for Medicare & Medicaid Services (CMS) in late-2015, the Federally-Facilitated Marketplaces (FFMs) have started sending notices informing employers that employees have enrolled in a FFM and were determined eligible for premium subsidies. Because the employer shared responsibility penalties set forth in Section 4980H of the Internal Revenue Code (the “Code”) could be triggered when at least one full-time employee obtains a premium subsidy on the Marketplace, an employer receiving one of these notices should understandably be concerned about the possibility of penalties.  Nevertheless, these notices do not guarantee that a penalty will be assessed.  Here’s what employers should know:

• There are two potential penalties under the employer shared responsibility (or pay-or-play) mandate – the “A Penalty” and the “B Penalty”. The A Penalty may be assessed against an applicable large employer (an employer with 50 or more full-time employees and equivalents) if the employer fails to offer minimum essential coverage to at least 95% of its full-time employees and at least one full-time employee enrolls in the Marketplace and receives a premium subsidy. The A Penalty is generally equal to $180 per month ($2,160 per year) multiplied by the number of all full-time employees, minus up to 30 full-time employees. The B Penalty could be assessed against an applicable large employer even if the 95% threshold is met if a full-time employee is offered unaffordable coverage or coverage that lacks minimum value. The B Penalty, which is equal to $270 per month ($3,240 per year), is assessed only against those full-time employees who enroll in the Marketplace and get a premium subsidy. Both penalty amounts are adjusted annually for inflation.

• An employer receiving a FFM subsidy notice is not automatically subject to a shared responsibility penalty. CMS has no authority to make penalty determinations under Code Section 4980H – any such determination will be made independently by the IRS. The IRS has not yet provided concrete procedures related to penalty assessments under Code Section 4980H, but it has indicated that employers will have the opportunity to appeal assessments.

• Various circumstances could exist under which an employee is entitled to a premium subsidy without triggering a penalty on the employer. For example, the employee could be part-time and ineligible for coverage under the employer’s plan. Alternatively, the employee could be in a “limited non-assessment period” such as a 90-day waiting period or an initial measurement period. Also, it may be that the employer’s offer of coverage is unaffordable for Marketplace subsidy purposes (which is based on 9.66% (for 2016) of household income) but is affordable under one of the affordability safe harbors allowed under the pay-or-play regulations. Finally, it may be that the employee was ineligible for coverage under a multiemployer plan, but the employer cannot be assessed a penalty based on the special interim guidance for multiemployer plan coverage.

• Nevertheless, there will undoubtedly be situations in which an employee receives a subsidy despite having an offer of affordable, minimum value employer-sponsored health coverage. Whether this happens due to an employee’s misunderstanding of the Marketplace application or the employee simply misrepresenting his or her opportunity to enroll in other coverage, employers have the ability to appeal a FFM’s subsidy determination. When the employee receiving a subsidy is a full-time employee who was offered coverage, the employer should strongly consider appealing. Although CMS cannot impose either the A or B Penalty, the IRS could later impose a penalty and it would be helpful for an employer to have a record showing that the subsidy determination was appealed and resolved in favor of the employer. When the employee is not a full-time employee, or some other circumstance exists such that the employer cannot be assessed a penalty, an employer would have less incentive to challenge the subsidy determination.

• If an employer decides to appeal a FFM’s subsidy determination, the appeal must be submitted no later than 90 days after the date the employer received the notice. If the appeal is resolved in favor of the employer, the relevant employee will receive a notice from CMS asking him or her to update the Marketplace application. The employee will also be informed that the failure to update the application could later result in tax liability.

• When completing a Marketplace application, employees are likely to enter the address of their worksite, which may not have HR representatives staffed at that location. Therefore, employers with multiple worksites should institute an internal mechanism for identifying the FFM subsidy notices and routing them to the correct person. These internal procedures will help avoid inadvertently missing the 90-day deadline to appeal a subsidy determination.

Employers can expect to receive increasing numbers of FFM notices in the coming months. In the future, subsidy notices may also be received under state-based Marketplaces.  In each case, employers should review their internal records to determine if there is any penalty risk.  If an employee’s receipt of a subsidy could trigger a penalty under Code Section 4980H, employers should consider appealing the subsidy determination if there is a basis on which to do so.