ACA reporting enforcement picks up steam

The employer shared responsibility (“pay or play”) mandate still requires applicable large employers (ALEs) to offer health insurance to full-time employees. The IRS is actively proposing employer shared responsibility payments (ESRPs) whenever it suspects that an ALE may not have complied with this coverage mandate. ALEs that do not offer qualified health coverage to substantially all full-time (FT) or full-time equivalent (FTE) employees may be liable for ESRP penalties. A timely, well-documented response is the best way to reduce or argue away a proposed ESRP.

Background

An ALE is an employer with at least 50 FT or FTE employees. An ESRP is owed when:

1. an ALE fails to offer minimum essential coverage to substantially all (95% or more) of its FT and FTE employees (as well as dependents) and at least one FT or FTE employee is offered a premium tax credit; or
2. an ALE offers minimum essential coverage to substantially all FT and FTE employees (as well as dependents) but at least one FT or FTE employee was allowed a premium tax credit because the coverage offered was not affordable by Affordable Care Act (ACA) calculus, did not provide minimum value or the individual was not offered coverage.

FT or FTE employees are those who work at least 30 hours per week or 130 hours in a month. ACA coverage is deemed affordable for 2022 if the employer’s lowest cost, self-only plan costs less than 9.61% of the employee’s annual household income (based on the federal poverty level) and is estimated to drop to 9.12% for 2023 coverage. The ESRP penalties for 2022 range between $2,750 and $4,120 per FT or FTE employee depending on the ACA provisions in violation. The penalty range for 2023 is projected to be between $2,880 and $4,320.

Reporting

All of this coverage information must be provided to employees and to the IRS. The draft 2022 forms and instructions currently have few, if any, changes from prior years. 2022 reporting is to be issued to employees by March 2, 2023 (for Form 1095-C). The IRS requires these forms to be submitted to it on or before March 31, 2023, if electronically filed (required for 250 or more forms) or Feb. 28, 2023, if paper forms are filed. Requisite filings include:

• Form 1094-B – Transmittal of Health Coverage Information Returns. Includes the filer’s name, address, employer identification number, contact information and the total number of Forms 1095-B being transmitted to the IRS.
• Form 1094-C – Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns. Includes the filer’s name, address, employer identification number, contact information and the total number of Forms 1095-C being transmitted to the IRS.
• Form 1095-A – Health Insurance Marketplace Statement. Filed by health insurance marketplaces on individuals enrolled in a qualified health plan through government exchanges.
• Form 1095-B – Health Coverage. Filed by health insurance issuers and carriers, this form discloses those individuals covered by minimum essential coverage.
• Form 1095-C – Employer-Provided Health Insurance Offer and Coverage. Filed by ALEs to verify employer-sponsored health coverage, disclose those individuals covered by minimum essential coverage and used in conjunction with the 1094-C to determine whether the ALE owes an ESRP.

IRS inquiries

While the IRS has not yet begun auditing ACA reporting in earnest, it has been active in issuing notices and assessing penalties on those employers that filed incorrect or inaccurate information or failed to file the required forms altogether. Currently assessing penalties for the 2019 reporting year and with 2020 reporting notices set to be released this fall and winter, the IRS commonly issues the following types of notifications to taxpayers:

• Letter 226J – Generally, the initial letter issued to ALEs that proposes ESRPs for employers who may have failed to provide offers of insurance to at least 95% of FT or FTE employees (as well as their dependents). This letter is being issued for 2019.
• Letters 5698 and 5699 – Typically, the precursor to assessing an ACA penalty related to not complying with the reporting requirement. These notices request information from the employer to confirm its name, employer identification number and address as well as information about how and when it filed its ACA forms. Penalties are subsequently assessed using Form W-2 counts when these letters go without a timely response. Letter 5699 is now being issued for the 2020 tax year; however, the IRS is still accepting remedial filings made now that tie back to the 2018 tax year.
• Letter 5005A – Sent when an ALE fails to annually file Forms 1094-C and 1095-C with employees and the IRS.
• Letter 972CG – Sent to employers that filed ACA forms after the published deadlines as well as those who filed these forms in the wrong format (e.g., via paper when the volume of forms required electronic submission).

Employers generally have 30 days to respond to these letters. The IRS recently ended its good-faith relief from these accuracy-related penalties so employers should be vigilant in maintaining their ACA records and correspondence. The IRS is now looking for proof, per employee, of actions taken in offering coverage, the types of coverage offered, waiver documentation, total annual of hours worked plus average monthly hours per employee, affordability calculations (including rate of pay and W-2 wages) per employee and so on. In addition, an incorrectly prepared ACA reporting form could also trigger one of the aforementioned IRS letters. With these letters running two to three years behind current-year reporting, employers must preserve careful records in order to support their filings.

The letter period is the most taxpayer-friendly area in which to work with the IRS. If the initial notice is not responded to within the 30-day period, the IRS will move the assessment forward; ultimately into IRS collections where it is more difficult for the taxpayer to explain any reporting deficiencies.

State-based reporting

California, Massachusetts, New Jersey, Rhode Island, Vermont and the District of Columbia have each implemented individual coverage mandates, with most also requiring employers to report offers of coverage. The deadlines and filing requirements vary from the federal provisions and vary by state. Privacy is a significant concern here, since some states will accept the entire federal reporting even though only a small subset of employees may actually be subject to that specific state’s coverage and reporting requirements.

Action steps

Recall, in 2021, the American Rescue Plan expanded subsidy eligibility and marketplace enrollment deadlines, thereby increasing ACA penalty exposure. Variability in workforce hours and pay adjustments driven by the pandemic and economic conditions could continue to impact affordability and full-time status determinations. Finally, rehires within 13 weeks of layoffs or furlough must be treated as ongoing employees which can also impact affordability and coverage restoration.

Employers also face challenges to processing responses to IRS inquiries into ACA reporting. This is particularly true for missing prior-year filings where the path to abatement requires submission of the forms in the here and now. Time, resource allocations, system and personnel changes (i.e., human resources, reporting vendors), acquisitions or divestitures of business lines or entities and lack of documentation can all cause delays and frustrations in the original reporting or notice responses.

In order to more readily comply with any IRS inquiry into ACA reporting, employers should be highly attentive to the following:

• Understanding the reporting codes used internally or by an outside provider
• Documenting full-time status measurement records and determinations since penalties apply on a monthly basis
• Safeguarding ACA information and location (including reporting forms, IRS AIR transmittal files, transmittal confirmations, benefits enrollment records, affordability computations, etc.)
• Incorporating ACA compliance into risk assessments as well as periodic vendor and other strategic change initiatives
• Soliciting qualified assistance if an IRS ACA-related notice is received

The IRS continues to improve its operating ability to police ACA compliance. At the same time, it is openly broadening its infrastructure to make a greater impact in this area. For these reasons, it is important to view the “pay or play” dynamic as one that will continue for the foreseeable future.

For more information on this topic, contact our team.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely.  The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.