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There are two potential ACA employer mandate penalties that can impact ALEs:
a) IRC §4980H(a)—The “A Penalty”
The first is the §4980H(a) penalty—frequently referred to as the “A Penalty” or the “Sledge Hammer Penalty.” This penalty applies where the ALE fails to offer minimum essential coverage to at least 95% of its full-time employees in any given calendar month.
The 2022 A Penalty is $229.17/month ($2,750 annualized) multiplied by all full-time employees (reduced by the first 30). It is triggered by at least one full-time employee who was not offered minimum essential coverage enrolling in subsidized coverage on the Exchange. Note: The IRS has not yet released the 2023 A Penalty increase.
The “A Penalty” liability is focused on whether the employer offered a major medical plan to a sufficient percentage of full-time employees—not whether that offer was affordable (or provided minimum value).
b) IRC §4980H(b)—The “B Penalty”
The second is the §4980H(b) penalty—frequently referred to as the “B Penalty or the “Tack Hammer Penalty.” This penalty applies where the ALE is not subject to the A Penalty (i.e., the ALE offers coverage to at least 95% of full-time employees).
The B Penalty applies for each full-time employee who was:
Only those full-time employees who enroll in subsidized coverage on the Exchange will trigger the B Penalty. Unlike the A Penalty, the B Penalty is not multiplied by all full-time employees.
In other words, an ALE who offers minimum essential coverage to a full-time employee will be subject to the B Penalty if:
The 2022 B Penalty is $343.33/month ($4,120 annualized) per full-time employee receiving subsidized coverage on the Exchange. Note: The IRS has not yet released the 2023 B Penalty increase.
Transparency in Coverage mandates and COVID-19 considerations continue to dominate the discussion in the employee benefits compliance space this summer, but an “old faithful” reporting requirement looms soon: the Patient-Centered Outcomes Research Institute (PCORI) filing and fee. The Affordable Care Act imposes this annual per-enrollee fee on insurers and sponsors of self-funded medical plans to fund research into the comparative effectiveness of various medical treatment options.
The typical due date for the PCORI fee is July 31, but because that date falls on a Sunday in 2022, the effective due date is pushed to the next business day, which is Aug. 1.
The filing and payment due by Aug. 1, 2022, is required for policy and plan years that ended during the 2021 calendar year. For plan years that ended Jan. 1, 2021 – Sept. 30, 2021, the fee is $2.66 per covered life. For plan years that ended Oct. 1, 2021 – Dec. 31, 2021 (including calendar year plans that ended Dec. 31, 2021), the fee is calculated at $2.79 per covered life.
Insurers report on and pay the fee for fully insured group medical plans. For self-funded plans, the employer or plan sponsor submits the fee and accompanying paperwork to the IRS. Third-party reporting and payment of the fee (for example, by the self-insured plan sponsor’s third-party claim payor) is not permitted.
An employer that sponsors a self-insured health reimbursement arrangement (HRA) along with a fully insured medical plan must pay PCORI fees based on the number of employees (dependents are not included in this count) participating in the HRA, while the insurer pays the PCORI fee on the individuals (including dependents) covered under the insured plan. Where an employer maintains an HRA along with a self-funded medical plan and both have the same plan year, the employer pays a single PCORI fee based on the number of covered lives in the self-funded medical plan and the HRA is disregarded.
The IRS collects the fee from the insurer or, in the case of self-funded plans, the plan sponsor in the same way many other excise taxes are collected. Although the PCORI fee is paid annually, it is reported (and paid) with the Form 720 filing for the second calendar quarter (the quarter ending June 30). Again, the filing and payment is typically due by July 31 of the year following the last day of the plan year to which the payment relates, but this year the due date pushes to Aug. 1.
IRS regulations provide three options for determining the average number of covered lives: actual count, snapshot and Form 5500 method.
Actual count: The average daily number of covered lives during the plan year. The plan sponsor takes the sum of covered lives on each day of the plan year and divides the number by the days in the plan year.
Snapshot: The sum of the number of covered lives on a single day (or multiple days, at the plan sponsor’s election) within each quarter of the plan year, divided by the number of snapshot days for the year. Here, the sponsor may calculate the actual number of covered lives, or it may take the sum of (i) individuals with self-only coverage, and (ii) the number of enrollees with coverage other than self-only (employee-plus one, employee-plus family, etc.), and multiply by 2.35. Further, final rules allow the dates used in the second, third and fourth calendar quarters to fall within three days of the date used for the first quarter (in order to account for weekends and holidays). The 30th and 31st days of the month are both treated as the last day of the month when determining the corresponding snapshot day in a month that has fewer than 31 days.
Form 5500: If the plan offers family coverage, the sponsor simply reports and pays the fee on the sum of the participants as of the first and last days of the year (recall that dependents are not reflected in the participant count on the Form 5500). There is no averaging. In short, the sponsor is multiplying its participant count by two, to roughly account for covered dependents.
The U.S. Department of Labor says the PCORI fee cannot be paid from ERISA plan assets, except in the case of union-affiliated multiemployer plans. In other words, the PCORI fee must be paid by the plan sponsor; it cannot be paid in whole or part by participant contributions or from a trust holding ERISA plan assets. The PCORI expense should not be included in the plan’s cost when computing the plan’s COBRA premium. The IRS has indicated the fee is, however, a tax-deductible business expense for sponsors of self-funded plans.
Although the DOL’s position relates to ERISA plans, please note the PCORI fee applies to non-ERISA plans as well and to plans to which the ACA’s market reform rules don’t apply, like retiree-only plans.
The filing and remittance process to the IRS is straightforward and unchanged from last year. On Page 2 of Form 720, under Part II, the employer designates the average number of covered lives under its “applicable self-insured plan.” As described above, the number of covered lives is multiplied by the applicable per-covered-life rate (depending on when in 2021 the plan year ended) to determine the total fee owed to the IRS.
The Payment Voucher (720-V) should indicate the tax period for the fee is “2nd Quarter.”
Failure to properly designate “2nd Quarter” on the voucher will result in the IRS’ software generating a tardy filing notice, with all the incumbent aggravation on the employer to correct the matter with IRS.
An employer that overlooks reporting and payment of the PCORI fee by its due date should immediately, upon realizing the oversight, file Form 720 and pay the fee (or file a corrected Form 720 to report and pay the fee, if the employer timely filed the form for other reasons but neglected to report and pay the PCORI fee). Remember to use the Form 720 for the appropriate tax year to ensure that the appropriate fee per covered life is noted.
The IRS might levy interest and penalties for a late filing and payment, but it has the authority to waive penalties for good cause. The IRS’s penalties for failure to file or pay are described here.
The IRS has specifically audited employers for PCORI fee payment and filing obligations. Be sure, if you are filing with respect to a self-funded program, to retain documentation establishing how you determined the amount payable and how you calculated the participant count for the applicable plan year.
Citing soaring gas prices, the Internal Revenue Service (IRS) on June 9 announced an increase in the optional standard mileage rate for the final six months of 2022.
Effective July 1 through Dec. 31, 2022, the standard mileage rate for the business use of employees’ vehicles will be 62.5 cents per mile—the highest rate the IRS has ever published—up 4 cents from the 58.5 cents per mile rate effective for the first six months of the year.
The rate is used to compute the deductible costs of operating an automobile for business use, as an alternative to tracking actual costs. Beyond the individual tax deduction, employers often use the standard mileage rate—also called the safe harbor rate—to pay tax-free reimbursements to employees who use their own cars, vans or trucks to conduct business for their employers.
Organizations are typically required to reimburse their workforce for the business use of their mixed-use assets, or personally owned assets such as vehicles that are required for their jobs.
Employers have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.
The IRS normally updates standard mileage rates once a year in the fall for the next calendar year. For vehicle use from Jan. 1 through June 30, 2022, employers and employees should use the rates set forth in IRS Notice 2022-03.
While fuel costs are a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs, the IRS noted. For cars employees use for business, the portion of the standard mileage rate treated as depreciation will stay at 26 cents per mile for 2022.
Midyear increases in the optional mileage rates are rare. The last time the IRS made such an increase was in 2011.
The new 2023 limits are:
HSA – Single $3,850 / Family $7,750 per year
HDHP (self-only coverage) – $1,500 minimum deductible / $7,500 out-of-pocket limit
HDHP (family coverage) – $3,000 minimum deductible / $15,000 out-of-pocket limit
The IRS just released IRS Notice 2022-04 that provides the updated fee for Patient-Centered Outcomes Research Institute (PCORI) paid by fully insured and self-funded health plans for the upcoming tax reporting period.
Even though the original PCORI fee assessments under the Affordable Care Act were scheduled to end after September 30, 2019, Congress extended these fees to be assessed by the IRS under the Further Consolidated Appropriations Act of 2020 for another ten years, until at least September 30, 2029.
The updated PCORI fee is now $2.79 per covered life for all plan years ending on or after October 1, 2021, and before October 1, 2022, up from $2.66 for the prior period. As a reminder, fully insured plans are to be assessed the applicable PCORI fee amount through their monthly premium payments made to their health insurance carrier. Self-insured plans pay this fee as part of the annual IRS Form 720 filing due by July 31 of each year.
The draft instructions for the Forms 1094-C and 1095-C for the 2021 reporting season were released in late September 2021 with subtle, but important changes. To an untrained eye, these changes may fly under the radar. However, for the first time since the Affordable Care Act’s (ACA’s) inception, employers who file incorrect or incomplete Forms 1095-C with the IRS may suffer costly penalties. The remainder of this article will explore the changes made in the draft instructions for the Forms 1094-C and 1095-C in 2021.
The 2020 instructions to the Forms 1094-C and 1095-C included language that asserted no penalty would be imposed under IRC sections 6721 or 6722 for incorrect or incomplete Forms 1095-C so long as the employer showed that it made good-faith efforts to comply with the information reporting requirements. Similar language has been included in Notices released by the IRS that correspond to all the ACA reporting seasons to date. However, Notice 2020-76, the Notice that extended the good-faith efforts relief for the 2020 reporting season and was incorporated into the final instructions for the Forms 1094-C and 1095-C in 2020, stated that the good-faith efforts relief would not continue for tax reporting seasons past 2020.
As a result of the good-faith efforts relief no longer applying, if an employer submits a Form 1095-C to the IRS or furnishes a Form 1095-C to an employee that is incorrect or incomplete, the employer could be penalized $280 per return. It should be noted that this penalty would apply twice to the same Form 1095-C, once for the Form 1095-C that is furnished to the employee and once for the Form 1095-C that is submitted to the IRS for a total of $560.
The chart below details the cost an employer could incur depending on the percentage of its Forms 1095-C that are filed incorrectly or incompletely. While the chart only discusses the penalty under IRC section 6721, if the IRS were to aggressively penalize an employer, the penalty could be doubled by the IRS by utilizing the penalty under IRC section 6722. The column labeled “# of Forms 1095-C” states the number of Forms 1095-C filed by the employer. The columns labeled with a “x%” state the presumed number of Forms 1095-C that are hypothetically filed incorrectly or incompletely. The dollar figure in the chart states the hypothetical penalty.
| # of Forms 1095-C | 1% | 3% | 5% | 10% | 15% | 20% | 25% |
|---|---|---|---|---|---|---|---|
| 100 | $280 | $840 | $1,400 | $2,800 | $4,200 | $5,600 | $7,000 |
| 1,000 | $2,800 | $8,400 | $14,000 | $28,000 | $42,000 | $56,000 | $70,000 |
| 2,500 | $7,000 | $21,000 | $35,000 | $70,000 | $105,000 | $140,000 | $175,000 |
| 5,000 | $14,000 | $42,000 | $70,000 | $140,000 | $210,000 | $280,000 | $350,000 |
| 10,000 | $28,000 | $84,000 | $140,000 | $280,000 | $420,000 | $560,000 | $700,000 |
| 25,000 | $70,000 | $210,000 | $350,000 | $700,000 | $1,050,000 | $1,400,000 | $1,750,000 |
| 50,000 | $140,000 | $420,000 | $700,000 | $1,400,000 | $2,100,000 | $2,800,000 | $3,500,000 |
As the chart above displays, an employer who submits 1,000 Forms 1095-C to the IRS with 10 percent of the Forms 1095-C being incorrect could be subject to a penalty of $28,000 under IRC section 6721. Additionally, that employer could be subject to a separate $28,000 penalty for furnishing incorrect Forms 1095-C to employees under IRC section 6722. Many employers and service providers in the ACA space have submitted Forms 1095-C to the IRS that have a much higher error rate than 10 percent in previous years. Consequently, it is easy to envision staggering penalties under IRC sections 6721 and 6722 if the IRS stringently enforces these penalties. As a result, employers must be confident that the information reported to the IRS on the Forms 1094-C and 1095-C is complete, meticulous and error free in order to avoid IRS penalties.
Additionally, for the first time in ACA reporting history the IRS appears set on keeping the deadline of January 31, 2022 to furnish the Forms 1095-C to employees. The 2021 draft instructions provide guidance on how an employer can request a 30 day extension. This extension is not automatically granted and therefore should not be relied upon by employers.
Two other small changes were made in the draft instructions to the Forms 1094-C and 1095-C. First, the maximum penalty under IRC sections 6721 and 6722 increased from $3,392,000 in 2020 to $3,426,000 in 2021. Second, two new codes were added for individual coverage health reimbursement arrangements (ICHRAs). Each new code involves employers who offered ICHRAs to the employee and the employee’s spouse.
Code 1T – Individual coverage HRA offered to employee and spouse (no dependents) with affordability determined using employee’s primary residence location ZIP code.
Code 1U – Individual Coverage HRA offered to employee and spouse (not dependents) using employee’s primary employment site ZIP code affordability safe harbor.
Since both new codes deal with ICHRAs and both should never be used, as the new codes do not offer coverage to dependent children, these new codes will have little impact on employers. Any employer who is using an ICHRA as part of their ACA strategy should be utilizing codes 1M, 1N, 1P, or 1Q depending on who in the employee’s family is eligible to utilize the ICHRA.
We anticipate the final instructions will be released any week with minimal, if any, changes compared to the draft instructions. While it is still possible the IRS may release a Notice extending the good-faith efforts relief to 2021 reporting and extend the due date to furnish the Forms 1095-C to full-time employees, employers should not rely on such a Notice this year. As a result, it is essential that employers make sure that every line 14 and 16 code combination submitted to the IRS is error free.
The IRS has released the 2022 contribution limits for FSA and several other benefits in Revenue Procedure 2021-45. The limits are effective for plan years that begin on or after January 1, 2022.
The IRS has proposed two significant changes to electronic filing requirements for various information returns including not just the Forms 1094-C and 1095-C filings required of many employers by the Affordable Care Act (ACA), but common payee statements like Forms W-2 and 1099. If the proposed changes are finalized – we expect that to happen by this autumn – all but the very smallest employers will be required to file these forms electronically for filing due dates falling in 2022 and beyond. Employers wishing to engage an ACA reporting and/or payroll vendor to comply with electronic filings requirements will need to begin making changes to comply.
Under current e-filing rules, an employer subject to the ACA’s employer mandate is not required to file its Forms 1094-C and 1095-C electronically unless the employer is submitting at least 250 of the forms to the IRS. When determining whether the employer crosses the 250-return threshold, the employer separately counts the different returns it files, such as its Forms 1094-C and 1095-C, and even payee statements like Forms W-2, 1099, etc.
For example, an employer with 150 ACA full-time employees and 50 part-time employees over the course of the calendar year may be required to file 200 Forms W-2, 150 Forms 1095-C and one Form 1094-C, but because the employer is not filing at least 250 of the same form, the employer is not required to file any of the forms electronically.
The new IRS proposal would drop the 250-return threshold to 100 for returns due in 2022 (and to 10 for returns due in 2023 or later years), and, most significantly, would require employers to aggregate the number of different returns it files when determining whether the 250-return threshold is reached. In the example above, for returns due in 2022, the employer would aggregate the 200 Forms W-2, 150 Forms 1095-C and the one Form 1094-C, for a total of 351 returns. Because the aggregated total of returns due from the employer is at least 250, all the returns must be filed electronically.
Many employers that until now have filed their Forms 1094-C/1095-C, W-2, 1099, etc. on paper will be required – assuming the IRS shortly finalizes the newly proposed regulations – to submit those forms to the IRS electronically for filings due in 2022. Almost all employers will be required to e-file by 2023. For employers wishing to engage a vendor to conduct electronic filing – particularly those for whom the e-filing status quo will change next year – the search for an e-filing vendor should begin.
The IRS has released IRS Notice 2020-84 providing the adjusted $2.66 Patient-Centered Outcomes Research Institute (PCORI) fee per covered individual for health plan years ending on or after October 1, 2020 and before October 1, 2021, which includes 2020 calendar plan years. The fee has increased $0.12 per covered individual from last year (from $2.54).
As detailed in last year’s alert, Congress surprisingly extended the PCORI fee for another decade (until 2029). Despite the originally scheduled sunsetting of the fee in the 2019 filing (for calendar plan years), PCORI filings are now here to stay as a summer staple for the foreseeable future.
The annual PCORI fee must be reported and paid to the IRS by August 2, 2021 via the second quarter Form 720.
The fee is imposed on health insurance issuers and self-insured health plan sponsors in order to fund the Patient-Centered Outcomes Research Institute (PCORI). The mission of the institute is to improve healthcare delivery and outcomes by producing and promoting high-integrity evidence-based information that comes from research guided by patients, caregivers and the broader health community.
The institute currently maintains a robust portfolio of patient-centered outcomes research that addresses a variety of high priority conditions and topics.
PCORI research projects are also targeting certain populations of interest such as: racial and ethnic minorities, low socioeconomic status, women, older adults and individuals with multiple chronic conditions. The PCORI website lists current and completed research projects as well as outcomes.
Fully Insured Medical Plans: Health Insurers (aka insurance carriers) are responsible for paying the fee on fully insured health policies. This fee is built into the insurance premium, so there is no action required by employers.
Self-Insured Medical Plans (Including HRAs): The plan sponsor (aka the employer) is responsible for paying the PCORI fee for self-insured health plans. Self-insured plans include so-called “level funded” plans. The employer must file the Form 720 and pay the fee.
The PCORI fee generally applies only to major medical plans and health reimbursement arrangements (HRAs). (See below for an exception that applies to many HRAs.)
The PCORI fee does not apply to dental and vision coverage that are excepted benefits (whether through a stand-alone insurance policy or meeting the “not integral” test for self-insured coverage). Virtually all dental and vision plans are excepted benefits.
The PCORI fee also does not apply to health FSAs (which must be an excepted benefit to comply with the ACA) or HSAs (which are not a group health plan).
For a quick reference guide, the IRS has published a table which summarizes the applicability of the fee to common types of health and welfare benefits.
Yes, an HRA is a self-insured health plan. However, the PCORI rules provide an exception to the fee requirement for an HRA where it is offered along with a self-insured major medical plan that has the same plan year as the HRA. This avoids the need to pay the PCORI fee for both the HRA and the self-insured major medical plan (i.e., each person covered by both plans is counted only once for purposes of determining the PCORI fee).
There is no exception from the PCORI fee for an HRA offered along with fully insured major medical coverage. While the insurance carrier is responsible for paying the PCORI fee for the fully insured medical plan, the employer is responsible for paying the PCORI fee on the HRA. The IRS is essentially double-dipping in this scenario by imposing the PCORI fee on the same lives covered by both the major medical and the HRA. In recognition of this, the HRA PCORI fee paid by the employer is determined by counting only one life per employee participating in the plan (and not dependents).
Summary: The PCORI fee is required for an HRA unless it is paired with a self-insured major medical plan that has the same plan year as the HRA. Where the PCORI fee is required, the employer is responsible for filing the Form 720 and paying the PCORI fee for an HRA solely for the covered employees (not dependents).
Plan Sponsors of self-insured health plans (other than an HRA) calculate the fee based on the average number of total lives covered by the plan (both employees and dependents).
Plan Sponsors can use one of three alternative methods which are summarized by the IRS in its PCORI fee homepage and PCORI fee FAQs:
Upon reinstatement of the fee in 2020, the IRS allowed plan sponsors an alternative method of calculating the average number of covered lives. Plan sponsors were able to use any reasonable method to calculate the average number of covered lives. This guidance was not extended to the 2021 filing, and employers must use one of the above three methods.
For calendar plan years, the applicable rate for the 2020 plan year will be $2.66 per covered life.
Employers filing for a self-insured medical plan should keep in mind that the plan year is the ERISA plan year reflected in the plan document, SPD, and Form 5500 (if applicable). The PCORI fee also applies to short plan years, defined as any plan year less than 12 months.
The fee is due July 31st (August 2nd in 2021) of the year following the last day of the plan year, including short plan years.
Examples
The IRS has published a table of the applicable filing deadline and rate for each plan year ending date.
The PCORI fee is filed on the second quarter IRS Form 720, which is due by August 2, 2021 (July 31st is a Saturday in 2021). Consult the IRS Instructions for Form 720 for direction on completing the form (see pages 8-9).