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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.
On Dec. 22, 2017, President Trump signed into law Congress’s tax reform legislation. The summary below addresses some of the changes that relate to compensation and employee benefits.
Individual shared responsibility – With respect to health care and employee benefits, the most important feature of the tax act is the elimination of the penalty on individual taxpayers who do not maintain minimum essential coverage. However, please note that this elimination of the penalty is prospective and only applies for months beginning after Dec. 31, 2018. Thus, the penalty remains fully in effect for 2018.
With the reduction in the penalty, some employers may see fewer employees enroll in health care coverage during their 2019 healthcare benefit open enrollment period. However, most employees will continue to view employers that offer health insurance coverage more favorably than those who do not. Therefore, offering health insurance will remain a valuable and tax-efficient recruiting and retention tool.
This may also reduce the number of individuals who enroll in healthcare through either the federal or various state specific healthcare marketplaces. However, premium tax credits will still be available for those individuals that purchase health insurance through these marketplaces. If enough healthy individuals drop their coverage, both the individual and employer group health market will likely see some cost increases to pay for the adverse selection impact of this change.
It is also important to remember that this change applies to the individual penalties only. The potential employer penalties for failing to offer coverage or offering inadequate coverage will remain, as well as the current law’s information reporting requirement.
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.
Starting in 2015, the Affordable Care Act (ACA) requires applicable large employers to offer affordable, minimum value health coverage to their full time employees (and dependents) or pay a penalty. The employer penalty rules are also known as the employer mandate or the “pay or play” rules.
Effective in 2014, affordability of health coverage is used to determine whether an individual is:
On July 24, 2014, the IRS released Revenue Procedure 2014-37 to index the ACA’s affordability percentages for 2015.
For plan years beginning in 2015, an applicable large employer’s health coverage will be considered affordable under the pay or play rules if the employee’s requires contribution to the plan does not exceed 9.56 percent of the employee’s household income for the year. The current affordability percentage for 2014 is 9.5 percent.
Applicable large employers can use one of the IRS’ affordability safe harbors to determine whether their health plans will satisfy the 9.56 percent requirement for 2015 plan years, if requirements for the applicable safe harbor are met.
This adjusted affordability percentage will also be used to determine whether an individual is eligible for a premium tax credit for 2015. Individuals who are eligible for employer-sponsored coverage that is affordable and provides minimum value are not eligible for a premium tax credit in the Exchange.
Also, Revenue Procedure 2014-37 adjusts the affordability percentage for the exemption from the individual mandate for individuals who lack access to affordable minimum essential coverage. For plan years beginning in 2015, coverage is unaffordable for purposes of the individual mandate if it exceeds 8.05 percent of household income.
The pay or play rules apply only to applicable large employers. An “applicable large employer” is an employer with, on average, at least 50 full-time employees (including full-time equivalents) during the preceding calendar year. Many applicable large employers will be subject to the pay or play rules starting in 2015. However, applicable large employers with fewer than 100 full-time employees may qualify for an additional year, until 2016, to comply with the employer mandate.
The affordability of health coverage is a key point in determining whether an applicable large employers will be subject to a penalty.
For 2014, the ACA provides that an employer’s health coverage is considered affordable if the employee’s required contribution to the plan does not exceed 9.5 percent of the employee’s household income for the taxable year. The ACA provides that, for plan year beginning after 2014, the IRS must adjust the affordability percentage to reflect the excess of the rate of premium growth over the rate of income growth for the preceding calendar year.
As noted above, the IRS has adjusted the affordability percentage for plan years beginning in 2015 to 9.56 percent. The affordability text applies only to the portion of the annual premiums for self-only coverage and does not include any additional cost for family coverage. Also, if an employer offers multiple health coverage options, the affordability test applies to the lowest-cost option that also satisfies the minimum value requirement.
Affordability Safe Harbors
Because an employer generally will not know an employee’s household income, the IRS created three affordability safe harbors that employers may use to determine affordability based on information that is available to them.
The affordability safe harbors are all optional. An employer may choose to use one or more of the affordability safe harbors for all its employees or for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category.
The affordability safe harbors are:
Beginning in 2014, the ACA requires most individuals to obtain acceptable health insurance coverage for themselves and their family members or pay a penalty. This rule is often referred to as the “individual mandate”. Individual may be eligible for an exemption from the penalty in certain circumstances.
Under the ACA, individuals who lack access to affordable minimum essential coverage are exempt from the individual mandate. For purposes of this exemption, coverage is considered affordable for an employee in 2014 if the required contribution for the lowest-cost, self-only coverage does not exceed 8 percent of household income. For family members, coverage is considered affordable in 2014 if the required contribution for the lowest-cost family coverage does not exceed 8 percent of household income. This percentage will be adjusted annually after 2014.
For plan years beginning in 2015, the IRS has increased this percentage from 8 percent to 8.05 percent.