What advisers need to know now about ACA penalties
Affordable Care Act compliance may not be fun, but there are consequences for failing to abide by the rules. Some advisers and employers might take the incoming administration’s talk about “repeal and replace” as a free pass for reporting. Even though President-elect Trump takes office this month, the 2016 reporting season is already underway, and penalties are still in play.
Until any real changes to the ACA are passed, the safest course of action for your clients is to continue to fulfill their ACA obligations as they stand today. We don’t know what healthcare reform and ACA reporting will look like in 2017, but we do know that change won’t be immediate.
Last year’s good faith effort relief meant that penalties were only issued in cases of late, unfinished, or egregiously poor filing. While the same relief has been extended through this year, it’s vital to note that the bar on “good faith” is being raised higher. Employers will need to prove they’re making, as the name implies, a true good faith effort — fudged or poorly gathered information won’t cut it.
Also see: “10 ways to improve 401(k)s in 2017.”
Your role as a benefit adviser is to make sure your clients understand what the penalties are, and help them actively use the correct methods and solutions to properly complete the filing process.
What are the Affordable Care Act penalties?
Not offering coverage is the most obvious way for an Applicable Large Employer to earn a penalty. In this case, the penalty is triggered by at least one full-time employee going to the marketplace and getting a subsidy or premium tax credit for healthcare coverage.
If this happens, and an employer offered coverage to less than 95% of its ACA full-time employees, it could be handed a $2,000 fine per full-time employee, excluding the first 30. This means that if your client has 100 full-time employees, it would be facing a whopping $140,000 fine annually — much higher than the cost of simply providing affordable coverage. The penalty is assessed on a monthly basis, so it may be less than $140,000 annually if the employer complies for part of the year.
There is a separate fine if coverage is offered, but it’s not affordable coverage. In this case, the company is fined $3,000 per full-time employee that receives a premium tax credit through a marketplace. This overall penalty cannot exceed what the employer would have been fined for not offering coverage at all. This penalty is also assessed on a monthly basis.
Another fine that fewer ALEs are aware of, but can cost them enormously in the long run, is the penalty for not providing Form 1095-C to employees. This can start at $250 per employee, and make its way up to as much as $3 million — all for failing to provide the tax forms needed for reporting.
Why do businesses get penalized?
First and foremost, if you’re working with ALEs, make sure they file — and do so on time. The deadline for 1095 employee fulfillment has been extended this year to March 2, as have good faith relief efforts, but failing to file the proper forms at the right time can still lead to penalties.
Many think that penalties are due to employers denying coverage, but this isn’t quite true. In a competitive job market, healthcare is a must-have for employees, and in almost all cases the penalties cost more than simple compliance. However, many employers, especially those with a large number of variable-hour workers, don’t realize exactly what portion of their workforce needs to be offered healthcare. This is where penalties can hit the hardest. If an employer mistakenly provides healthcare to only 80% of its eligible employees, instead of the minimum 95%, the company is still a candidate for penalties — even if it thought it was complying.
Similarly, the concept of affordability may be strange to some. If your clients don’t know the definition (refer to the three authorized Affordability Safe Harbors under §4980H of the Tax Code), they may assume the coverage they’re offering is affordable when it’s not. Make sure they provide the proper safe harbors that indicate affordability so they can prove their case to the IRS.
This is where most penalties spring from: The IRS says an employer is wrong, and the company can’t prove otherwise. In most cases, this just means keeping good track of its data, staying organized, and knowing the safe harbors — often with the help of an intelligent solution. By using these practices and the proper tools to get there, your clients can show the IRS that they made their best effort in providing accurate information.
Once real penalties kick in, if an employer messes up, even accidentally, the company will still get penalized. While getting it close may be enough to pass with this year’s extended good faith effort relief, getting it right is the only way to know they’ll pass for sure. Good faith only stretches far enough to ensure mistakes don’t lead to penalties — employers still need a passable effort at filing correctly, or they’ll have to pay up.