Owning ACA reporting nonfiling penalties

The process of buying and selling businesses is complicated and stressful. An organization’s past actions and history form the basis for diligence needing to be done — and done well — in order to assess a deal’s worthiness. Prudent strategists will add Affordable Care Act (ACA) compliance to the list of risk considerations worth contemplating to avoid costly implications after a deal is done.

Background

The ACA’s Employer Shared Responsibility (“pay or play”) mandate still requires Applicable Large Employers (ALEs) to offer health insurance to full-time employees. The Internal Revenue Service (the Service) continues to actively propose penalties whenever it suspects that an ALE may not have complied with this coverage mandate. Most noteworthy for this article is how the Service polices this mandate. It does so by way of reviewing the ALE’s submission of Forms 1094/1095 on an annual basis. For this reason, it also stands ready to introduce other penalties when it cannot find evidence of these forms.

For the 2023 tax year, the 1094/1095 forms must be issued to employees by March 4, 2024 (for Form 1095-C). The IRS requires these forms to be submitted to it on or before April 1, 2024 if electronically filed (required for 250 or more forms) or Feb. 28, 2024 if paper forms are filed. The paper filing threshold will decrease dramatically effective Jan. 1, 2024. As of that date, employers will only be able to paper file forms if they are preparing fewer than 10 forms.

The notification lag

The IRS has operated on a two-to-three-year lag since the IRS began imposing penalty propositions. By way of recent example, the Service is now releasing notices tied to Tax Year 2020 reporting-related activity. It is doing this even though employers completed their Tax Year 2022 reporting obligations during the first quarter of 2023. Most of these same employers are now setting up to ensure their Tax Year 2023 requirements are met in early 2024.

IRS Notices 5698 and 5699 provide the initial indication of a suspected nonfiling. To get to this place, the IRS evaluates Form W-2 submission counts at a Federal Employer Identification Number (FEIN) level against Form 1094 submissions for that same year. Whenever the W-2 count is sufficient enough for the IRS to deduce the employer might be an ALE yet cannot find evidence of a Form 1094 being on file for that same employer, it issues one of these notices. If no explanations are formally offered, noncompliance penalties are calculated and presented to the employer. For 2023, the penalty for an assumed intentional disregard is $580 per form. Since the Service has no Forms 1094 or 1095 on file to use in the calculation, it calculates the penalty using that FEIN’s Form W-2 count. In many instances, this count is significantly higher than the count of Forms 1095 the employer would have submitted on behalf of the full-time employees to which it is required to offer coverage.