ACA Pay or Play Penalty Letters Coming “Late 2017”

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.

IRS Won’t Accept 2017 Individual Tax Returns without ACA Information

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.

The ACA Remains for Now, So What’s Next for Employers?

With the Republicans’ failure to pass a bill to repeal and replace the Affordable Care Act (ACA), employers should plan to remain compliant with all ACA employee health coverage and annual notification and information reporting obligations.

Even so, advocates for easing the ACA’s financial and administrative burdens on employers are hopeful that at least a few of the reforms they’ve been seeking will resurface in the future, either in narrowly tailored stand-alone legislation or added to a bipartisan measure to stabilize the ACA’s public exchanges. Relief from regulatory agencies could also make life under the ACA less burdensome for employers.

“Looking ahead, lawmakers will likely pursue targeted modifications to the ACA, including some employer provisions,” said Chatrane Birbal, senior advisor for government relations at the Society for Human Resource Management (SHRM). “Stand-alone legislative proposals have been introduced in previous Congresses, and sponsors of those proposals are gearing up to reintroduce bills in the coming weeks.”

These legislative measures, Birbal explained, are most likely to address the areas noted below.
(more…)

Late Breaking Benefits News for 2016

Congress and the IRS were busy changing laws governing employee benefit plans and issuing new guidance under the ACA in late 2015. Some of the results of that year-end governmental activity include the following:

Protecting Americans from Tax Hikes Act of 2015 (“PATH Act”)

The PATH Act, enacted by Congress and signed into law on December 18, 2015, made some the following changes to federal statutory laws governing employee benefit plans:

• The ACA’s 40% excise tax (aka “Cadillac Tax”) on excess benefits under applicable employer sponsored coverage — so called “Cadillac Plans,” due to the perceived richness of such coverage — is  delayed from 2018 to 2020.

• Formerly a nondeductible excise tax, any Cadillac Tax  paid by employers will now be deductible as a business expense.

• Beginning with plan years after November 2, 2015,  employers with 200+ employees will not be required to automatically enroll new or current     employees in group health plan coverage, as originally required under the ACA.

• After December 31, 2015, individual taxpayers who purchase private health insurance via the Healthcare Exchange will not be eligible to claim a Health Care Tax Credit on their tax returns.

IRS Notice 2015-87

On December 16, 2015, the IRS issued Notice 2015-87, providing guidance on employee accident and health plans and employer shared-responsibility obligations under the ACA. Guidance provided under Notice 2015-87 applies to plan years that begin after the Notice’s publication date (December 16^th), but employers may rely upon the guidance provided by the Notice for periods prior to that date.

Notice 2015-87 covers a wide-range of topics from employer reporting obligations under the ACA to the application of Health Savings Account rules to rules for identifying individuals who are eligible for benefits under plans administered by the Department of Veterans Affairs. Following are some of the highlights from Notice 2015-87, with a focus on provisions that are most likely to impact non-governmental employers.

• Under the ACA, an HRA may only reimburse medical expenses of those individuals (employee, spouse, and/or dependents) who are also covered by the employer’s group health plan providing minimum      essential coverage (“MEC”) that is integrated with the HRA.

• Employer opt-out payments (i.e., wages paid to an employee solely for waiving employer-provided coverage) may, in the view of Treasury and the IRS, effectively raise the contribution cost for employees who desire to participate in a MEC plan. Treasury and the IRS intend to issue      regulations on these arrangements and the impact of the opt-out payment on the employee’s cost of coverage. Employers are put on notice that if an opt-out payment plan is adopted after December 16, 2015, the amount of the offered opt-out payment will likely be included in the employee’s cost of coverage for purposes of determining ACA affordability.

• Treasury and the IRS will begin to adjust the affordability safe harbors to conform with the annual adjustments for inflation applicable to the “9.5% of household income” analysis under the ACA. For plan years beginning in 2015, employers may rely upon 9.56% for one or more of the affordability safe harbors identified in regulations under the ACA, and 9.66% for plan years beginning in 2016. For example, in a plan year beginning in 2016, an employer’s MEC plan will meet affordability standards if the employee’s contribution for lowest cost, self-only coverage does not exceed 9.66% of the employee’s W-2 wages (Box      1).
• To determine which employees are “full-time” under the ACA, “hours of service” are intended to include those hours an employee works and is entitled to be paid, and those hours for which the employee is entitled to be paid but has not worked, such as sick leave, paid vacation, or periods of legally protected leaves of absence, such as FMLA  or USERRA leave.

• The Treasury and IRS remind applicable large employers that they will provide relief from penalties for failing to properly complete and submit Forms 1094-C and 1095-C if the employers are able to show that they made good faith efforts to comply with their reporting obligations.

The IRS Gives A Holiday Gift to Applicable Large Employers – 2015 ACA Reporting is Delayed

In the recently released Notice 2016-4, the IRS has extended the due dates for certain 2015 Affordable Care Act information reporting requirements.

Specifically, the Notice extends:

• the due date for furnishing to individuals the 2015 Form 1095-B and Form 1095-C from February 1, 2016, to March 31, 2016, and

• the due date for filing with the IRS the 2015 Form 1094-B, Form 1094-C and Form 1095-C from February 29, 2016, to May 31, 2016, if not filing electronically, and from March 31, 2016, to June 30, 2016 if filing electronically.

In the Notice, the IRS also grants special relief to certain employees and related individuals who receive their Form 1095-C or Form 1095-B, as applicable, after they have filed their returns:

• For 2015 only, individuals who rely upon other information received from employers about their offers of coverage for purposes of determining eligibility for the premium tax credit when filing their income tax returns will NOT be required to amend their returns once they receive their Forms 1095-C or any corrected Forms 1095-C.

• For 2015 only, individuals who rely upon other information received from their coverage providers about their coverage for purposes of filing their returns will NOT be required to amend their returns once they receive the Form 1095-B or Form 1095-C or any corrections.

Thus, generally, employers should not be concerned that furnishing these Forms on a delayed basis in accordance with the Notice will force employees to file amended 2015 income tax returns.

Finally, the extensions do not require the submission of any request or other documentation to the IRS and have no effect on information reporting provisions for other years.

Bill Increases Penalties for IRS Reporting Failures including ACA

In July 2015, President Obama signed into law the Trade Preferences Extension Act of 2015. Included in the bill was an important provision that affects welfare and retirement benefit plans. The Act sizably increases filing penalties for information return and statement failures under the Internal Revenue Code, effective for filings after December 31,2015. Employers now face significantly larger penalties for failing to correctly file and furnish the ACA forms 1094 and 1095 (shared responsibility reporting requirements) as well as Forms W-2 and 1099-R. 

Background

Sections 6721 and 6722 of the IRC impose penalties associated with failures to file- or to file correct- information returns and statements. Section 6721 applies to the returns required to be filed with the IRS, and Section 6722 applies to statements required to be provided generally to employees.These penalty provisions apply to the ACA shared responsibility reporting Forms 1094-B, 1094-C, 1095-B, and 1095-C (Sections 6055 & 6056) failures as well as other information returns and statement failures, like those on Forms W-2 and 1099.

For ACA:

• Section 6055 reporting supports IRS enforcement of the individual mandate
  
• Section 6056 reporting supports IRS enforcement of the employer mandate and low-income subsidies for coverage purchased in the public marketplace.

The Sections 6055 & 6056 reporting requirements are effective for medical coverage provided on or after January 1, 2015, with the first information returns to be filed with the IRS by February 29, 2016 (or March 31,2016 if filing electronically) and provided to individuals by February 1, 2016. 

Increase in Penalties

The Trade Preferences Extension Act of 2015 (Act) contains several tax provisions in addition to the trade measures that were the focus of the bill. Provided as a revenue offset provision, the law significantly increases the penalty amounts under Sections 6721 and 6722. A failure includes failing to file or furnish information returns or statements by the due date, failing to provide all required information, as well as failing to provide correct information. 

The law increases the penalty for:

• General failures- from $100 to $250 per return and increases the annual cap on penalties from $1.5 million to $3 million. 
  
• Intentional failures- from $250 to $500 per return with no annual cap on penalties

Other penalty increase also apply, including those associated with timely filing a corrected return. Penalties could also provide a one-two punch under the ACA for employers and other responsible entities. For example, under Sec 6056, applicable large employers (ALE) must file information returns to the IRS (the 1094-B and 1094-C) as well as furnish statements to employees (the 1095-B and 1095-C). So incorrect information shared on those forms could result in a double penalty- one associated with the information return to the IRS and the other associated with individual statements to employees. 

Final regulations on the ACA reporting requirements provide short-term relief from these penalties. For reports files in 2016 (for 2015 calendar year info), the IRS will not impose penalties on ALE members that can show they made a “good-faith effort” to comply with the information reporting requirements. Specifically, relief is provided for incorrect or incomplete info reported on the return or statement, including Social Security numbers, but not for failing to file timely.