IRS gets serious about ACA penalty letters
The Internal Revenue Service is now issuing penalty letters to employers who are failing to provide health coverage in accordance with the Affordable Care Act’s employer shared responsibility provision.
However, there is still an opportunity for advisers to help clients rectify the problem before they are issued a fine.
The employer shared responsibility provision states that if an employer does not offer adequate, affordable coverage to its full time employees, and at least one employee qualifies for premium assistance — the individual’s income is between 100% and 400% of the federal poverty level — then one of two penalties can be assessed.
The first is the ‘no coverage’ excise tax. Pursuant to Internal Revenue Code section 4980H(a), it applies if the applicable large employer fails to offer minimum essential coverage to at least 95% – 70% in 2015 – of its full-time employees working 30 or more hours per week and at least one employee qualifies for the premium tax credit.
Second, the ‘inadequate or unaffordable’ excise tax penalty, pursuant to IRC section 4980H(b), applies if the employer offers minimum essential coverage, but it either does not meet the minimum value standard or is unaffordable; and at least one employee qualifies for the premium tax credit.
Because the issuing of Letter 226-J was repeatedly delayed, Jenny Riley, vice president of product management at Hodges-Mace, says many employers will be caught off-guard because they could receive penalties dating back to tax year 2015.
“That was the first year where employer responsibility took effect, while individual could have had subsidies in 2014, the employer was only required to do an offer or be subject to penalty with some transition relief in their upcoming plan year,” Riley says. “After many delays, the IRS has gathered all of their reporting information for 2015 and after reconciliation they are finally sending out the letters.”
Each letter will include a description of the IRC section 4980H penalties, a schedule to make penalty payments, an ALE response form, a list of employees receiving premium tax credit, procedures if ALE disagrees with proposed penalty, actions the IRS will take if ALE fails to respond as well as IRS contact information.
Karen McLeese, vice president of employee benefit regulatory affairs at CBIZ, says the ALE would need to respond to the IRS within the timeframe specified in the letter – generally, within 30 days – either affirming that it agrees that the excise tax is due, or that it does not believe the excise tax is due.
“The employer’s response is accomplished by filing a Form 14764, ‘ESRP Response,’ to the IRS,” McLeese says. “The IRS will then send acknowledgement of the ALE response by sending Form 227 if ALE disagrees with the proposed payment amount contained in Form 227.”
Riley says just because an employer receives a letter does not mean they will have to submit to fines.
“When the employer receives that letter, the most important thing a benefit adviser can encourage them to do is respond immediately,” Riley says. “By correcting the information the employer submitted on their 1094-C and 1095-C they can object to the penalty and explain the situation.”
If the employee in question was working part-time or under a leave of absence, these are some examples as to ways employers can fight the penalties. The available healthcare options by the employer could also have been affordable to the eligible employee, but they could have experienced some confusion during the enrollment process causing them to not enroll to begin with.
McLeese says the most important takeaway for employers who are impacted by the letters is to have ready access to their 2015 offers of coverage as well as their 2015 IRC section 6056 reporting documentation, accomplished on the Form 1095-C series.
“If an employer receives a Letter 226-J, it should ensure that it responds timely, and it should work closely with its tax and legal adviser throughout the process,” McLeese says.
Those employers who receive a letter for no coverage excise tax IRC section 4980H(a) could receive penalties between $2,080 and $2,320 per effected employee depending upon the plan year the letter stipulates.
For those who receive a letter for inadequate or unaffordable excise tax IRC 4980H(b) could receive penalties between $3,120 and $3,480 per effected also depending upon the plan year the letter addresses.