Mama Told Me There Would Be Days Like This
Applicable Large Employers (ALEs) have been hoping that Congress, or the Trump administration, would make the ACA employer requirements go away. However, I have been warning our clients that we need to be prepared for the IRS to begin collecting employer payments for violation of the §4980H shared responsibility rules (the “employer mandate”), and now we know IRS collection activities are about to start.
The IRS has released a copy of Letter 226J. This letter will be sent to employers who the IRS believes owe a payment due to failure to meet §4980H requirements. The IRS has announced that they plan to start sending letters to employers “late in 2017” regarding employer coverage offered to employees during calendar year 2015. Since I am writing this on November 8th, I’m guessing we will start to see the first employer letters very soon! We released an issue brief with additional details on how the IRS will handle the collection process that you can find here.
Collection Based on Employer Reporting
The IRS determines §4980H liability based on data provided by employers in their 1094 and 1095 reporting. We all know that for 2015 reporting (completed early in 2016) employers and vendors struggled with the employer reporting requirements, and many errors were made. We even had reports of major payroll vendors submitting thousands of 1095s that they knew contained errors, but could not correct in time to meet the filing deadline. We believe some employers will receive letters from the IRS claiming they owe a payment because the reporting was done wrong, not due to an actual violation of the §4980H rules. In these cases, employers will need to demonstrate that coverage was properly offered in order to get the IRS to reduce or withdraw the payment request.
2015 Transition Rules
It is important to remember that a number of §4980H transition rules were in place for 2015 that will have an effect on employer liability. For coverage offered during the 2015 calendar year:
- 4980H applied only to employers with at least 100 FTEs.
- Employers will not face any 4980H(a) liability as long as coverage is offered to at least 70% of all full-time employees (this changes to 95% in 2016).
- 4980H(a) liability does not apply to the first 80 full-time employees (Beginning in 2016, the §4980H(a) payment will apply after the first 30.).
- To avoid 4980H payments, an employer must make an offer of coverage to full-time employees and their dependent children. In 2015, no payment will be due for plans that do not offer coverage to dependents, if the plan is taking steps to do so in 2016.
- Employers with a non-calendar plan year did not have to comply with 4980H until the beginning of their 2015 plan year, as long as the employer has not changed their plan year after 2012, and other criteria are met.
The 70% offer transition rule is particularly important. Most employers who tried to make an offer of coverage to all full-time employees will meet this threshold, even if some mistakes were made in defining full-time employees. This should limit the number of employers who owe payments under §4980H(a). It will be much more likely that employers will face the risk of §4980H(a) liability in 2016, when the offer of coverage requirement increased to 95% of all full-time employees. The IRS has not yet announced when it plans to start collection efforts for coverage provided in 2016.
- Employers with high numbers of variable hour, seasonal, and temporary employees face the biggest risk of missing the 70% coverage offer requirement.
- Although there may not be very many employers who owe a large 4980H(a) payment, a larger number of employers will face small §4980H(b) payments. Such payments will be triggered if coverage was unaffordable for employees who bought subsidized individual insurance through an Exchange.
- Employers who improperly classify employees as independent contractors face potential “double jeopardy.” This process may expose cases of improper classification to the IRS. When the individuals are properly classified as employees, the employer may fail to meet the 70% 4980H(a) threshold if the so-called “contractors” were not offered coverage.
- Much of the employer reporting focus seemed to be on completing the Form 1095-C. However, we saw many employers making basic mistakes in the 1094-C that could trigger IRS scrutiny. For example, many employers reported the wrong number of full-time employees in column (b) on page 2 of the 1094-C. The IRS will use that number to determine whether an employer has made an offer of coverage to 70% of their full-time employees.
The first call the employer will make when they receive the 226J from the IRS will be to their benefits advisor. Many accounting firms and law firms are not qualified to analyze an employer’s ACA-related definition of full-time employees, the employer’s health plan eligibility rules, or how to properly complete or correct Forms 1094 and 1095. Employers should also consider working with someone other than their ACA reporting vendor to respond to an IRS inquiry because vendor reporting errors may be part of the problem. When a client receives a 226J, benefits consulting firms need to be prepared to assist clients in collecting the data necessary to respond to the IRS. Benefit Comply will also provide a service to our broker and consulting firm clients to assist employers through this process.