The Internal Revenue Service (IRS) recently announced, without much fanfare, that it is now issuing penalties for employers who have violated the employer mandate for the 2015 tax year. In a posting to a series of frequently asked questions (FAQs), the IRS announced in early November that it was beginning to issue Letter 226-J, which contains detailed information concerning the penalty assessment. This process demonstrates that the IRS is now pulling together information from the Affordable Care Act (ACA) marketplaces and IRS Forms 1095-C to generate the penalties.
The link to the IRS FAQ which discusses their procedure can be found by clicking here.
What is the violation?
The ACA provided that employers with over 100 full-time equivalent employees in the 2015 year (reduced to 50 for years after 2015) were required to offer affordable health insurance that met minimum standards or face penalties. The penalties, which are significant, would arise only if an employee obtained health coverage through the ACA marketplaces and received a premium tax credit.
The ACA marketplaces have provided the IRS with information about the credit recipients, and employers should have provided IRS Forms 1095-C with information concerning employee coverage.
The penalty, assuming that the employer was subject to the ACA and offered affordable coverage that met minimum standards, is $250 per month for each month that each employee received a premium tax credit from the exchange. If the employer was subject to the ACA and did not offer appropriate coverage, the penalty is $2,000 per year for all full-time employees—not merely those employees who received the premium tax credit.
What does the letter provide?
The letter will inform the employer of the employees who received a premium tax credit and the months for which the credit was granted. The letter will also include a form that the employer can use to contest the assessment on a per employee basis. If the employer does not contest the assessment within 30 days of the date of the letter, the employer has, in effect, waived its appeal rights and agrees to pay the penalty.
A copy of the letter that will be issued can be found by clicking here.
The penalties can be avoided by an employer providing proof to the IRS that the employer was not subject to the ACA; that the employer was subject to the ACA, and the employee was not eligible for coverage (due to hours of service or being in the waiting period); the employee was properly excluded from coverage; or, the employee had been offered coverage and declined it. Proof for employers subject to the ACA should have been provided on accurately reported IRS Forms 1095-C.
What should I do if I receive a letter?
This is a letter that the employer should not ignore. An employer who was diligent about preparing its IRS Forms 1095-C should be able to review its employment records and provide proof to the IRS. An employer who filed inaccurate IRS Forms 1095-C, or didn’t file the forms at all (that will generate another penalty of $250 per form not filed) will have to explain the inaccuracy or omission—a tougher argument to make.
Employers need to take the requirement to file an accurate IRS Form 1095-C seriously. Employers who delegated that responsibility to employees who didn’t understand the complex coding requirements, or outside providers who made the filing without employer review, may now be faced with significant costs.
We would be pleased to assist you in responding to these notices and discussing other ACA compliance issues, including the accurate preparation of IRS Form 1095-C. For more information on this topic, please contact Ted Ginsburg, CPA, JD, at 440-449-6800 or email Ted.