Under the Affordable Care Act (ACA), does an employer have to pay a penalty tax if it fails to offer group health plan coverage to employees' dependents?

An applicable large employer (ALE) who does not offer affordable essential group health plan coverage to full-time employees and their dependents may have to pay a penalty under the employer shared responsibility mandate ("pay or play") provision of the ACA.

The act allows ALEs to either offer group health insurance to employees "and their dependents" or pay a fee (called a "penalty tax") assessed on the number of full-time employees. So, who is considered a "dependent" for this purpose?

The employee's children, both biological and adopted, up to age 26 are considered dependents for the shared responsibility mandate. Stepchildren and foster children are specifically excluded from this requirement. Employers may not consider other factors, such as whether the child is a student, is tax dependent on the employee, is employed, or is married. Simply put, if the employee has adopted or biological children under the age of 26, they must be offered coverage.

If an ALE fails to offer coverage to these dependents, it is treated as not offering coverage at all, and a penalty may be assessed.

The penalty is not automatic; rather, it is triggered when a full-time employee applies for coverage from a state marketplace exchange and receives a premium tax credit or cost-sharing reduction payment.

For example, if Fatima's employer offers coverage only to employees, she might decline the employer's coverage and obtain coverage for herself and her dependent daughter through the exchange; the assessable penalty to the employer will then be triggered if Fatima qualifies for and receives a premium tax credit subsidy through the exchange.

Alternatively, if Fatima accepts the employer's coverage for herself only, but her daughter obtains coverage (and a premium tax subsidy) through the exchange, the state exchange could potentially inquire why the daughter is not covered under Fatima's plan. When the state learns that the employer is not offering dependent coverage, the assessment penalty would be triggered.

There is no requirement to offer coverage to an employee's spouse. ALEs could exclude spouses from coverage, and no penalty would be assessed.

The IRS provides additional information on Liability for the Employer Shared Responsibility Payment.