COVID-19 and the Affordable Care Act

With the COVID-19 pandemic stretching to all corners of the United States, group health plans have felt the impact of workforce shutdowns and restrictions as well as new laws passed by Congress. It’s important for employers and group health plans to consider the impact of these recent workforce and legislative changes within the scope of the Affordable Care Act (ACA).

Employment Practices and the Employer Mandate

For applicable large employers (those with 50 or more full-time equivalent employees), the employer mandate requires that all full-time employees as defined by the ACA are offered minimum value and affordable health coverage.  Employers who fail this mandate risk being subject to either the 4980H(a) (“sledgehammer”) penalty or the 4980H(b) (“tack-hammer”) penalty under the ACA.

Layoffs and Furloughs

Employers having to enact layoffs (without termination) or furloughs for their employees face the greatest potential for inadvertently triggering the “sledgehammer” penalty under the ACA. Under the Employer Mandate, many employers measure their full-time employees via the look-back method, which means they have already determined which employees are considered ACA full-time for the full 2020 calendar year. Employers who officially terminate employees do NOT have a responsibility for continuing to offer individuals coverage, but employers furloughing or moving employees to an unpaid leave status may have a responsibility for offering coverage under the Mandate. If an employer chooses to furlough or put employees on leave without terminating their employment, the following considerations should be made:

  • To avoid any potential for exposure to the “sledgehammer” penalty under the ACA, employers should verify that all ACA full-time employees are continually offered health coverage, even if at 100% of cost, while the furlough or leave period is taking place. Employers failing to offer “essentially all” of their ACA full-time employees minimum essential coverage may be subject to a $2,570 annual penalty (in 2020) for every ACA full-time employee, minus the first 30.
  • Employers should understand the exposure that may exist in offering a COBRA or 100% of cost offer to employees who are still considered ACA full-time while on leave. If that full-time employee waives the COBRA/100% offer and elects a subsidized policy in the ACA Marketplace, the applicable large employer is subject to a “tack-hammer” annualized penalty (in 2020) of $3,860 per applicable employee.
  • Employers should document these offers of coverage and also confirm with their insurance carriers how these offers are being made to ensure carrier eligibility considerations are met.

Breaks in Service

Under the Employer Mandate, employees who face extended leaves with zero hours of credited service (whether officially terminated or on unpaid leave/furlough) will be subject to “break in service” rules under the Affordable Care Act. Under the look-back method, if an employee returns to service after a period of 13 or more weeks without any credited service hours, the employer may consider the employee as a “new hire” for the purpose of the Employer Mandate upon their return. For educational institutions, this break in service period is 26 or more weeks. Additionally, employers can treat an employee as new if they return from a break of 4 or more weeks without any credited service hours, given that break in service was longer than the employee’s actual service tenure prior to the break.

One important item to note, however, is that these rules only address how an employee can be treated under the ACA upon their return to work after the break in service. As noted previously, if an employer furloughs an employee without terminating them, their ACA status during the break in service will have already been determined based on the rules for measuring new or ongoing employees.


As mentioned previously, if applicable employees move to an unpaid leave status but maintain an ACA full-time status, employers offering coverage at COBRA or 100% cost will have potential exposure to the “tack-hammer” penalty under the ACA. In 2020, this penalty is an annual amount of $3,860 for each employee who elects a subsidized policy in the ACA Marketplace, assessed on a monthly basis. While this potential penalty payment likely costs less than offering the employee affordable coverage, employers should still keep in mind that this scenario represents exposure to a penalty that could be levied a few years down the road.

This responsibility exists in situations where individuals remain employed but place onto unpaid leave – employers do not have this potential exposure in cases where an employee terminates employment.

Over-the-Counter Drug Changes for Tax-Advantaged Accounts

Section 9003 of the Affordable Care Act established a regulation that stated that distributions from health FSAs, HRAs, and HSAs, could not reimburse the purchase of over-the-counter medicines or drugs without prescription, effective 1/1/2011.

But with the passage of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in late March 2020, individuals are now able to use tax-advantaged accounts (like Health FSAs, HRAs, and HSAs) to reimburse payments for over-the-counter drugs not prescribed by a physician as well as certain menstrual care products.

It is expected that the IRS will update prior guidance or disseminate additional information on the tax treatment of these products in the future.

Employers are strongly encouraged to consider the workplace and health plan changes resulting from the COVID-19 pandemic through the scope of the Affordable Care Act. Conrad Siegel is available to provide consulting to employer groups considering the ACA impact of these changes.

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Our health and welfare compliance updates are designed to provide useful information to organizations about the operation and management of their employee benefit plans. Although we go to great lengths to ensure that only accurate and timely information is provided, we recommend that you consult with an attorney for professional assurance that our information, and your interpretation of it, is appropriate for your particular situation. Nothing provided herein should be construed as legal or tax advice.