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On July 22, 2019, the IRS announced that the ACA affordability percentage for the 2020 calendar year will decrease to 9.78%. The current rate for the 2019 calendar year is 9.86%.
As a reminder, under the Affordable Care Act’s employer mandate, an applicable large employer is generally required to offer at least one health plan that provides affordable, minimum value coverage to its full-time employees (and minimum essential coverage to their dependents) or pay a penalty. For this purpose, “affordable” means the premium for self-only coverage cannot be greater than a specified percentage of the employee’s household income. Based on this recent guidance, that percentage will be 9.78% for the 2020 calendar year.
Employers now have the tools to evaluate the affordability of their plans for 2020. Unfortunately, for some employers, a reduction in the affordability percentage will mean that they will have to reduce what employees pay for employee only coverage, if they want their plans to be affordable in 2020.
For example, in 2019 an employer using the hourly rate of pay safe harbor to determine affordability can charge an employee earning $12 per hour up to $153.81 ($12 X 130= 1560 X 9.86%) per month for employee-only coverage. However in 2020, that same employer can only charge an employee earning $12 per hour $152.56 ($12 X 130= 1560 X 9.78%) per month for employee-only coverage, and still use that safe harbor. A reduction in the affordability percentage presents challenges especially for plans with non-calendar year renewals, as those employers that are subject to the ACA employer mandate may need to change their contribution percentage in the middle of their benefit plan year to meet the new affordability percentage. For this reason, we recommend that employers re-evaluate what changes, if any, they should make to their employee contributions to ensure their plans remain affordable under the ACA.
As we have written about previously, employers will sometimes use the Federal Poverty Level (FPL) safe harbor to determine affordability. While we won’t know the 2020 FPL until sometime in early 2020, employers are allowed to use the FPL in effect at least six months before the beginning of their plan year. This means employers can use the 2019 FPL number as a benchmark for determining affordability for 2020 now that they know what the affordability percentage is for 2020.
The IRS has created a webpage on understanding Letter 227, which certain applicable large employers (ALEs) may receive in connection with the assessment of employer shared responsibility penalties (aka Pay or Play penalties). As background, the IRS uses Letter 226J to notify an ALE of a proposed penalty assessment. ALEs have 30 days to respond, using Form 14764 to indicate their agreement or disagreement with the proposed penalty amount. Letter 227 acknowledges the ALE’s response to Letter 226J and explains the outcome of the IRS’s review and the next steps to fully resolve the penalty assessment. There are five different versions of the letter (samples are provided of each version on the IRS website):
Only Letters 227-L and 227-M call for a response, which must be provided by the date stated in the letter. The IRS stresses that the Letter 227 is not a bill. Notice CP 220J is used to collect the employer shared responsibility penalty payment.
Recipients of these letters may disagree with all or part of the proposed assessment amount. In many cases, there is good reason to disagree, since the IRS is evaluating compliance based on ACA reporting Forms 1094-C and 1095-C from 2015 — the first year for these filings, when confusion was common. Therefore, providing the IRS with updated information or correcting filing errors is likely to reduce or even eliminate the assessment.
It appears that 2015 proposed assessment letters will continue during 2018, and that employers will be notified of 2016 proposed assessments either later in 2018 or in 2019 (absent legislative relief or a legal challenge to the employer mandate).
ALEs started reporting compliance information from 2015 to the IRS on Forms 1094-C and 1095-C in early 2016. An ALE may receive an IRS assessment letter for the following reasons:
Letter 226-J states the proposed penalty (with accompanying calculations) and a list of employees who received a premium tax credit by month. The letter also indicates whether the proposed assessment is for an “a” or “b” penalty (so far, most are “a” penalties). The “a” penalty relates to whether the employer offered health coverage to substantially all (70% in 2015, 95% after that) full-time employees (and dependents), while the “b” penalty relates to whether the coverage offered met the minimum value requirements and was affordable. Recent 226-J letters have proposed penalties in the following situations:
First, any company that consists of more than one ALE will want to direct the Letter 226-J to the correct ALE so it can respond promptly. The most likely cause of incorrect assessments is errors in Forms 1094-C and 1095-C, as these are the forms the IRS uses to determine compliance with the employer mandate. The following are some suggestions for responding to these letters and avoiding assessments, now and in the future:
ALEs that discover an error after receiving Letter 226-J should not re-file the forms and should respond to the letter in one of two ways: pay the proposed penalty or disagree with all or part of the proposed assessment following IRS procedures.
ALEs that respond to the IRS will receive Letter 227, which acknowledges receipt of the ESRP Response form and describes any next steps for the ALE. An ALE that disagrees with the IRS’s proposed or revised assessment may request a pre-assessment conference with the IRS Office of Appeals by the response date on Letter 227 (generally 30 days from the date of the letter).
Failing to respond to Letter 226-J within 30 days will trigger a Notice and Demand for Payment (Notice CP 220J). After that, the penalty amount will be subject to IRS lien and levy enforcement actions, and interest will start to accrue.
ALEs (or their ACA reporting vendors) need to be careful in filing Forms 1094-C and 1095-C in the future. Assuming the employer mandate requirements are met, completing the forms correctly the first time should ensure that ALEs do not receive Letter 226-J. ALEs that receive a proposed assessment letter should consult with qualified legal counsel to evaluate the assessment and respond appropriately. Additional information is available at the IRS’s Letter 226-J Website.
ALEs that discover filing errors in their 2016 or 2017 filings of Forms 1094-C and 1095-C should obtain copies of the erroneous forms and re-file corrected forms as soon as possible (re-filing is generally permissible before a Letter 226-J is received). Self-correction is the best way to stay ahead of these issues before the IRS gets involved.
Many Applicable Large Employers (ALE’s) have already started received Letter 226J from the IRS that indicates their proposed assessment of a penalty under the Employer Shared Responsibility provision of the Patient Protection and Affordable Care Act (ACA).
Letter 226J outlines several things for the ALE receiving it. The letter will tell the ALE what the proposed penalty assessment could be and will also state whether the assessment is based on an “A” or “B” Penalty. An “A” Penalty is assessed when at least one full-time employee is provided a premium tax credit when the employee obtains coverage in the healthcare marketplace exchange. An ALE may be subject to a “B” Penalty if employees decline substandard coverage (aka coverage offered is not affordable) offered by the ALE and then receive a tax credit when obtaining coverage from the marketplace exchange. The letter also provides a list to the ALE of the full-time employees that received a premium tax credit and therefore created the potential for a penalty under the ACA.
It is very important for ALE’s to respond to Letter 226J and do so in a timely manner. The IRS provides 30 days, from the date of issuance, for ALE’s to respond, and if no response is made by the ALE, the IRS will conclude the employer does not disagree with the proposed assessment. ALE’s should not assume that because they received a letter that they will owe a penalty or that the amount outlined in the letter is the amount they will ultimately pay to the IRS for non-compliance with the ACA. Additionally, if no response is made to the IRS, the IRS will demand payment by issuing notice CP 220J. Only once the notice and demand for payment is received is the ALE required to make the penalty payment. Letter 226J is not requesting any payment but is giving ALE’s the chance to respond/disagree with the decision initially made by the IRS & Marketplace.
Letter 226J clearly outlines instructions on how to respond to the letter if the ALE feels that it is not liable for the proposed penalty. ALE’s will complete Form 14764 responding to the IRS that it does not agree with the penalty determination. The ALE will provide the IRS with a signed statement explaining why it does not agree with the determination. Any supporting documentation should be provided to the IRS (for example, records indicating dates of termination of employees, proof that the ALE offered coverage to full-time employees) and any other information requested in Letter 226J. The ALE should also make any changes to the Employee Premium Tax Credit (PTC) Listing that was enclosed with Letter 226J. The Employee PTC Listing (Form 14765) will be included with Letter 226J and Form 14764 (ESRP Response). The Employee PTC Listing identifies each employee who received a PTC by month and also the line 14 and line 16 indicator codes that were provided on the employee’s 1095-C form. If the ALE provided the incorrect indicator codes on form 1095-C, the Employee PTC Listing provides a line for the ALE to correct the codes used.
Once the IRS receives the response to Letter 226J, it will acknowledge that it has received the response by sending the ALE a version of Letter 227. There are 5 versions of Letter 227, and the ALE will receive the appropriate version, acknowledging receipt of their response and an outline of any further action that may be required.
IRS has begun notifying employers of their potential liability for an ACA employer shared responsibility payment in connection with the 2015 calendar year. It recently released Forms 14764 and 14765, which employers can use to dispute the assessment.
The Affordable Care Act (ACA) imposes employer shared responsibility requirements that are commonly referred to as the “employer mandate.” Beginning in 2015, applicable large employers (ALEs) – generally, employers with at least 50 full-time employees – are required to offer minimum essential coverage to substantially all full-time employees and their dependents, or pay a penalty if at least one full-time employee enrolls in marketplace coverage and receives a premium tax credit. Even if they offer employees coverage, ALEs may still be subject to an employer shared responsibility payment if the coverage they offer to full-time employees does not meet affordability standards or fails to provide minimum value.
The IRS announced their plans in Fall of 2017 to notify employers of their potential liability for an employer penalty for the 2015 calendar year. It released FAQs explaining that Letter 226J will note the employees by month who received a premium tax credit, and provide the proposed employer penalty. Additionally, the IRS promised to release forms for an employer’s penalty response and the employee premium tax credit (PTC) list respectively.
On Form 14764, employers indicate full or partial agreement or disagreement with the proposed employer penalty, as well as the preferred employer penalty payment option. An employer that disagrees with the assessment must include a signed statement explaining the disagreement, including any supporting documentation. This form also allows employers to authorize a representative, such as an attorney, to contact the IRS about the proposed employer penalty.
On Form 14765, the IRS lists the name and last four digits of the social security number of any full-time employee who received a premium tax credit for one or more months during 2015 and where the employer did not qualify for an affordability safe harbor or other relief via Form 1095-C. Each monthly box has a row reflecting any codes entered on line 14 and line 16 of the employee’s Form 1095-C. If a given month is not highlighted, the employee is an assessable full-time employee for that month – resulting in a potential employer assessment for that month.
If information reported on an employee’s Form 1095-C was not accurate or was incomplete, an employer wishing to make changes must use the applicable indicator codes for lines 14 and 16 described in the Form 1094-C and 1095-C instructions. The employer should enter the new codes in the second row of each monthly box by using the indicator codes for lines 14 and 16. The employer can provide additional information about the changes for an employee by checking the “Additional Information Attached” column. As mentioned:
Employers: Carefully Consider 226J Letter Responses
Miscoding can happen for different reasons, including vendor errors and inaccurate data. To minimize risk of additional IRS exposure, employers should carefully consider how best to respond to a 226J letter given circumstances surrounding the disputed assessments. For example, changing the coding on the 1095-C of an employee from full-time to part-time could trigger further review or questions by the IRS on the process for determining who is a full-time employee – and may increase the likelihood of IRS penalties for reporting errors on an employer’s Form 1095-Cs.
In its October FAQs, the IRS stated that it “plans to issue Letter 226J informing ALEs of their potential liability for an employer shared responsibility payment, if any, in late 2017.” If the IRS sticks to that timing, all notices should be sent out by the end of this calendar year. However, because the IRS has not indicated that it will inform employers that they have no employer penalty due, it is impossible to say that an employer not receiving a Letter 226J in 2017 is home free for 2015 employer penalties.
Employers should review the newly released forms so they are prepared to respond within 30 days of the date on the Letter 226J. They should also ensure processes are in place to make these payments, as necessary. Even employers who are not expecting any assessments will need to prepare to respond to the IRS within the limited timeframe to dispute any incorrect assessments.
As we near closer to Thanksgiving, it’s safe to say we are in “late 2017” territory. Last week, the IRS issued new FAQ guidance informing employers that they can expect notice of any potential ACA employer mandate pay or play penalties in late 2017.
What Will the Letter Look Like?
The IRS recently posted a copy of the Letter 226J here: https://www.irs.gov/pub/notices/ltr226j.pdf
Letters Will Look Back to 2015
The ACA employer mandate pay or play rules first took effect in 2015. The IRS Letters 226J at issue will relate only to potential penalties in that first year, and therefore they will be relevant only to employers that were applicable large employers (ALEs) in 2015.
In general, an employer was an ALE in 2015 if it (along with any members in its controlled group) employed an average of at least 50 full-time employees, including full-time equivalent employees, on business days during the preceding calendar year (2014).
Note that a special 2015 transition rule provided that certain “mid-sized” employers between 50 and 100 full-time employees could have reported an exemption from potential pay or play penalties.
What Are the Potential 2015 Penalties?
a) §4980H(a)—The “A Penalty” aka No Coverage Offered
This is the big “sledge hammer” penalty for failure to offer coverage to substantially all full-time employees. In 2015, this standard required an offer of coverage to at least 70% of the ALE’s full-time employees. (For 2016 forward, this standard has been increased to 95%).
The 2015 A Penalty was $173.33/month ($2,080 annualized) multiplied by all full-time employees then reduced by the first 80 full-time employees (reduced by the first 30 full-time employees for 2016 forward). It was triggered by at least one full-time employee who was not offered group coverage enrolling in subsidized coverage on the Exchange.
The reduced 70% threshold for the 2015 penalty should be sufficient for virtually all ALEs in 2015 to avoid the A Penalty, provided they offered a group health plan with eligibility set at 30 hours per week or lower. It would be very unlikely for a surprise A Penalty to arise for 2015.
b) §4980H(b)—The “B Penalty” aka Coverage Not Affordable
This is the much smaller “tack hammer” penalty that will apply where the ALE is not subject to the A Penalty (i.e., the ALE offered coverage to at least 70% of full-time employees in 2015, or 95% thereafter). It applies for each full-time employee who was not offered coverage, offered unaffordable coverage, or offered coverage that did not provide minimum value and was enrolled in subsidized converge on the Exchange.
The 2015 B Penalty was $260/month ($3,120 annualized). Unlike the A Penalty, the B Penalty multiplier is only those full-time employees not offered coverage (or offered unaffordable or non-minimum value coverage) who actually enrolled in the Exchange. The multiple is not all full-time employees.
What Happened to My Section 1411 Certification?
In the vast majority of states, they never came!
In short, the 1411 Certification (typically referred to as Employer Exchange Notices) informs the employer that one or more of their employees have been conditionally approved for subsidies (the Advance Premium Tax Credit) to pay for coverage on the exchange.
One important purpose of the notice is it provides employers with the chance to contemporaneously challenge the employee’s subsidy approval. Near the time of the employee’s subsidy approval, the ALE can show that it made an offer of minimum essential coverage to the full-time employee that was affordable and provided minimum value.
In other words, the notices provide the ALE with the opportunity to prevent the employee from incorrectly receiving the subsidies, and the ALE from ever receiving the Letter 226J from the IRS (because all ACA pay or play penalties are triggered by a full-time employee’s subsidized Exchange enrollment).
CMS admitted in a September 2015 FAQ that they were not able to send the notices for 2015 for federal exchange enrollment (most state exchanges took the same approach), but the potential penalties will nonetheless still apply.
The result is that ALEs will for be receiving their first notice of potential 2015 penalties via IRS Letter 226J in “late 2017.”
How Does the IRS Determine Potential Penalties?
The 2015 ACA reporting via Forms 1094-C and 1095-C (as well as the employee’s subsidized exchange enrollment data for 2015) serve as the primary basis for the IRS determination.
What Do I Need to Do?
First of all, review the information carefully.
The first-year ACA reporting for 2015 was a particularly difficult one, and one in which the IRS provided extended deadlines and a good faith efforts standard. It is very possible that the numerous challenging systems issues that made the first-year (and, frankly, all subsequent years) ACA reporting so difficult resulted in certain inaccuracies on the 2015 Forms 1094-C and 1095-C.
Be sure to review any potential penalties carefully with your systems records to confirm the reporting was correct.
a) If You Agree with the Penalty Determination – You will complete and return a Form 14764 that is enclosed with the letter, and include full payment for the penalty amount assessed (or pay electronically via EFTPS).
b) If You Disagree with the Penalty Determination – The enclosed Form 14764 will also include a “ESRP Response” form to send to the IRS explaining the basis for your disagreement. You may include any documentation (e.g., employment or offer of coverage records) with the supporting statement.
The response statement will also need to include what changes the ALE would like to make to the Forms 1094-C and/or 1095-C on the enclosed “Employee PTC Listing,” which is a report of the subsidized Exchange enrollment for all of the ALE’s full-time employees. The Letter 226J includes specific instructions on completing this process.
The IRS will respond with a Letter 227 that acknowledges the ALE’s response to Letter 226J and describes any further actions the ALE may need to take. If you disagree with the Letter 227, you can request a “pre-assessment conference” with the IRS Office of Appeals within 30 days from the date of the Letter 227.
If the IRS determines at the end of the correspondence and/or conference that the ALE still owes a penalty, the IRS will issue Notice CP 220J. This is the notice and demand for payment, with a summary of the pay or play penalties due.
In a recent statement released by the IRS it advised that it would not accept individual 2017 tax returns that did not indicate whether the individual had health coverage, had an exemption from the individual mandate, or will make a shared responsibility payment under the individual mandate. Therefore, for the first time, an individual must complete line 61 (as shown in previous iterations) of the Form 1040 when filing his/her tax return. This article explains what the new IRS position means for the future of ACA compliance from an employer’s perspective.
First, it will be critical (more so this year than in year’s past) that an employer furnish its requisite employees the Form 1095-C by the January 31, 2018 deadline. In previous years, this deadline was extended (to March 2, 2017 last year). However, with the IRS now requiring the ACA information to be furnished by individual tax day, April 17, 2018, employers will almost certainly have to furnish the Form 1095-C to employees by the January 31, 2018 deadline. This is a tight deadline and will require employers to be on top of their data as the 2017 calendar year comes to a close.
An employee who is enrolled in a self-insured plan will need the information furnished in part III of the Form 1095-C to complete line 61 on his/her tax return. It is reasonable to assume that an employee is more likely to inquire as to the whereabouts of the Affordable Care Act information necessary to complete his/her 2017 tax return. Therefore, the possibility of word getting back to the IRS that an employer is not furnishing the Form 1095-C statements to employees is also likely greater in 2017 compared to past years. Remember, an employer can be penalized $260 if it fails to furnish a Form 1095-C that is accurate by January 31, 2018 to the requisite employees. This penalty is capped at $3,218,500. The $260 per Form penalty and the cap amount can be increased if there is intentional disregard for the filing requirements.
The IRS statement continues the IRS’ trend of being more strenuous with ACA requirements. Many employers have received correspondence from the IRS about missing Forms 1094-C and 1095-C for certain EINs. Frequently, this has been caused by the employer incorrectly filing one Form 1094-C for the aggregated ALE group as opposed to a Form 1094-C for each Applicable Large Employer member (ALE member). While the IRS’ latest statement does not ensure that enforcement of the employer mandate (the section 4980H penalties) is coming soon, one could infer that the IRS will soon be sending out penalty notices with respect to the employer mandate.
With the actions taken by the IRS in 2017, all employers need to be taking the reporting of the Forms 1094-C and 1095-C seriously. As of the date of this publication, the Form 1095-C must be furnished to an employer’s requisite employees by January 31, 2018.
Until very recently, employers were at risk of receiving steep fines if they reimbursed employees for non-employer sponsored medical care – the Affordable Care Act (ACA) included fines of up to $36,500 a year per employee for such an action. Late in 2016, however, President Obama signed the 21st Century Cures Act and established Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). As of January 1, 2017, small employers can offer these tax-free medical care reimbursements to eligible employees.
If an employee incurs a medical care expense, such as health insurance premiums or eligible medical expenses under IRC Section 213(d), the employer can reimburse the employee up to $4,950 for single coverage or $10,000 for family coverage. Employees may not make any contributions or salary deferrals to QSEHRAs.
The maximum amount must
be prorated for those not eligible for an entire year. For example, an employer
offering the maximum reimbursement amount should only reimburse up to $2,475 to
an employee who has been working for the company for six months. For a complete
list of medical expenses covered under IRC 213(d), see https://www.irs.gov/pub/irs-pdf/p502.pdf.
Employers may tailor which expenses they will reimburse to a certain extent,
and do not have to reimburse employees for all eligible medical expenses.
Much like other healthcare reimbursement arrangements, employees may have to provide substantiation before reimbursement. The IRS has discretion to establish requirements regarding this process, but has not yet done so. Although reimbursements may be provided tax-free, they must be reported on the employee’s W-2 in Box 12 using the code “FF.”
To offer QSEHRAs, an employer cannot be an applicable large employer (ALE) under the ACA. Only employers with fewer than 50 full-time equivalent employees can offer this benefit. Further, a group cannot offer group health plans to any employees to qualify.
Typically, an employer that chooses to offer a QSEHRA must offer it to all employees who have completed at least 90 days of work. The few exceptions to this rule include part-time or seasonal employees, non-resident aliens, employees under the age of 25, and employees covered by a collective bargaining agreement.
Employers may offer differing reimbursement amounts based on employee age or family size. However, such variances must be based on the cost of premiums of a reference policy on the individual market. It is currently unclear which reference policy will be selected or how permitted discrepancies will be calculated.
To be eligible for a tax-free reimbursement, employees must have proof of minimum essential coverage. It is uncertain how closely employers will have to scrutinize such proof, although guidance will hopefully be available soon.
Eligible employees must disclose to health exchanges the amount of QSEHRA benefits available to them. The exchanges will account for the reported amount, even if the employee does not utilize it, and will likely reduce the amount of the subsidies available. Employers should take this into account before adopting a QSEHRA.
In order to establish a QSEHRA, employers will have to set up and administer a plan. Group health plan requirements, such as ACA reporting and COBRA requirements, do not apply to QSEHRAs. But in order to properly provide reimbursements to employees, employers will likely have to establish reimbursement procedures.
Additionally, any eligible employees must be notified of the arrangements in writing at least 90 days before the first day they will be eligible to participate. For the current year, the IRS is giving employers who implement QSEHRAs an extension until March 13, 2017 to provide a notice. The notice must provide the amount of the maximum benefit, and that eligible employees inform health insurance exchanges this benefit is available to them. It also must inform eligible employees they may be subject to the individual ACA penalties if they do not have minimum essential coverage.
The IRS has released final 1094 C and 1095 C forms for 2016 and has posted final instructions as well. The changes from the 2015 forms were minor. However, the instructions for completing the 1094 C and 1095 C forms for 2016 have changed significantly. The changes primarily were more extensive explanations on how to complete the forms.
The final forms and instruction can be found at:
As of now, a full cycle of reporting and penalty determinations has not yet been seen. The due dates for providing the forms and submitting them to the IRS were delayed for the 2015 forms. Employers may not see penalty determinations from the IRS for these forms.
The reporting requirements will affect applicable large employers (ALEs) every year. Employers should establish a process for populating the forms and submitting them to the IRS. If you are responsible for completing these forms, we recommend reviewing the final instructions to ensure understanding of the requirements for completing &submitting the forms.
The following summarizes key points from the 2016 final instructions:
The 2016 instructions are much clearer than the filing instructions from 2015.
The following summarizes key points from the final 2016 Form 1094 C:
The 1094 C has changed minimally for 2016.
The following summarizes key points from the final 2016 Form 1095 C:
A conditional coverage offer to a spouse does not include a spousal surcharge. It does include spousal force outs (spouse not offered coverage if coverage is available through spouse’s employer). Another conditional offer would be if you required spouses to enroll in their employers’ plan, before they could be eligible for your plan.
Employers should start addressing how they will handle reporting for 2016. If you are responsible for completing or checking the forms, read through the instructions. The final 2016 instructions explain more practically the reporting requirements. More examples are included as well.
If you are a self-funded plan and choose to use the B forms for specific non-employees, the B forms and instructions can be found at:
Both the 1095 B forms and the 1095 C forms have a VOID box in the upper right hand corner. Employers are instructed to never check the VOID box.
Both the 1095 B and 1095 C forms include instructions for taxpayers to retain the form with their tax records. It appears these forms will not have to be submitted with tax returns in 2017.
The good faith compliance standard will not apply in 2016 unless the IRS decides at a later date to extend it. In addition, the original deadlines will apply.
Employers should be gearing up now to complete the necessary forms for 2016.
The Affordable Care Act (ACA) established Health Insurance Marketplaces (also called Exchanges) where individuals can shop and enroll in health coverage. Individuals who meet certain criteria are eligible for premium subsidies and cost-sharing reductions for coverage on the Marketplace.
For the first time, in 2016 some employers will receive a notice from a Marketplace indicating that one of their employees signed up for health coverage through the Marketplace and received advanced premium subsidies. Many employers are asking what these notices mean and what actions they should take if they receive one.
Premium subsidies and cost-sharing reductions are designed to expand healthcare coverage by making insurance, and its utilization, more affordable. Premium subsidies, more accurately referred to as a premium tax credit, are claimed on an individual’s income tax return at the end of the year. What is unique about this tax credit is that an individual can choose to have the expected premium tax credit advanced throughout the year, in which case the government makes payments directly to the health insurer on the individual’s behalf. Importantly, individuals who have access to health coverage through an employer that is affordable and meets minimum value are not eligible to receive the premium tax credit or advances of the premium tax credit for their coverage.
The ACA generally requires that applicable large employers – generally employers with 50 or more full-time employees, including full-time equivalents – offer health coverage that is affordable and of minimum value to their full-time employees (and their dependents) or face an Internal Revenue Service (IRS) tax. This is often referred to as the employer “pay or play” or employer mandate provision. Tax liability under this employer provision is triggered if one of the employer’s full-time employees receives a premium tax credit and the amount of the tax liability is determined by the number of full-time employees who received the premium tax credit.
During the Marketplace application process, individuals are asked a host of questions, including questions about access to health coverage through an employer. If the Marketplace determines that the individual does not have access through an employer to coverage that is affordable and meets the required minimum value, and assuming the individual meets other eligibility criteria, advance payments of the premium tax credit can begin.
In such an instance, the Marketplace is required to send the employer a Marketplace notice. This will be the first year the Federally Facilitated Marketplace (FFM) is sending out these notices. It is worth noting that there is not a commitment to send a notice to all employers, and the FFM has said it can send a notice only if the individual provides a complete employer address. Consequently, some employers expecting Marketplace notices may not receive them and notices may not be mailed to the preferred employer address.
The Marketplace notices will give employers advance warning that they may have potential tax liability under the employer mandate of the ACA. However, there are reasons that receiving a notice does not necessarily mean the IRS will be in hot pursuit, including:
The FFM recently posted a sample of its 2016 notice which can be found here.
Please note that the notice suggests that employers should call the IRS for more information if they have questions, however, IRS telephone assistors will be unable to provide information on the Marketplace process, including the appeals process, and will be unable to tell an employer whether they owe a tax under the employer mandate.
An employer who receives a Marketplace notice may want to appeal the decision that the individual was not offered employer coverage that was affordable and of minimum value. An employer has 90 days from the date of the notice to file an appeal, which is made directly to the Marketplace. Importantly, the IRS will independently determine whether an employer has a tax liability, and the employer will have the opportunity to dispute any proposed liability with the IRS. Similarly, an individual will have the opportunity to challenge an IRS denial of premium tax credit eligibility. Any contact by the IRS, however, will occur late in the game after the year’s tax liabilities have already been incurred. Therefore, although an appeal is not required, it may be advisable.
Regardless of whether an employer pursues an appeal, an employer, particularly one that offers affordable, minimum value health coverage, should communicate to its employees about its offering. Although an applicable large employer is required to furnish IRS Form 1095-C to full-time employees detailing the employer’s offer, a better option is providing employees with information before they enroll in Marketplace coverage.
In summary, the Marketplace notice serves as an advance warning that either the employer or the employee may have a tax liability. Given this exposure, employers should review Marketplace notices and their internal records and consider taking action.