The IRS is rolling out enforcement of the large employer “pay or play” penalty tax for 2015, with preliminary penalty calculation letters anticipated to begin to be issued between now and the end of 2017. This will potentially impact employers who, over 2014, averaged 100 or more full-time employees, plus full-time equivalents, and who in 2015 either did not offer group health coverage to at least 70% of its full-time employees, or offered coverage that was “unaffordable,” as defined under the ACA, and for whom at least one full-time employee qualified for premium tax credits on a health exchange.
The sample penalty summary table the IRS has just circulated leaves space for a six-figure annual penalty amount, so substantial amounts of business revenue could be at stake in the collection process. Below is a timeline beginning with receipt of a notice from the IRS of a preliminary penalty calculation (Letter 226J), which includes the penalty summary table; the timeline is based on recently-updated IRS FAQs on the penalty collection process. Employers must respond by the date set forth in the Letter 226J, which generally will be 30 days from the date of the letter. However due to habitually slow IRS internal processing, employers may have less than two weeks from date of actual receipt, to prepare a response. ACA reporting vendors may not be equipped to assist with responses to preliminary penalty assessments, so employers who receive a Letter 226J identifying a preliminary penalty amount should look to ERISA or other tax counsel, or an accountant with knowledge of the ACA, in order to best protect their interests. Not all IRS communication forms referenced below had been released as of the date of this post but it will be updated as the forms become available.
- The start point is an employer who is an ALE for 2015 (based on 2014 headcount) and who has one or more FT employees who obtain premium tax credits for at least one month in 2015, as reflected in ACA reporting (and an affordability safe harbor or other relief was not available).
- The ALE receives Letter 226J with enclosures, including the penalty summary table, Form 14764 Employer Shared Responsibility Payment (ESRP) Response, and Form 14765 Premium Tax Credit (PTC) List, identifying employees who potentially trigger ACA penalties.
- The ALE has until the response date set forth on Letter 226J to submit Form 14764 ESRP Response and backup documentation. The deadline will generally be no more than 30 days from date of Letter 226J but internal IRS processing may cut in to that time budget.
- The IRS will acknowledge the ALE’s response, via one of five different versions of Letter 227.
- The ALE either takes the action outlined in Letter 227 (e.g., makes original or revised ESRP payment), or
- the ALE requests a pre-assessment conference with IRS Office of Appeals, in writing, within 30 days from the date of Letter 227, following instructions set forth in Letter 227 and in IRS Publication 5, Your Appeal Rights.
- If ALE fails to respond to Letter 226J or Letter 227, the IRS will assess the proposed ESRP payment amount and issue Notice CP 220J, notice and demand for payment.
- Notice CP 220J will include a summary of the ESR payment amount and reflect payments made, credits applied, and balance due, if any; it will instruct ALE how to make payment. Installment agreements may be reached per IRS Publication 594.
ACA reporting deadlines for applicable large employers arrive early in 2017 and, through Notice 2016-70, the IRS has now offered a 30-day extension on the January 31, 2017 deadline to furnish employee statements – Forms 1095-C. The new deadline is March 2, 2017 and it is a hard deadline, no 30-day extension may be obtained. There is no extension on the deadline to file Forms 1095-C with the IRS under cover of transmittal Form 1094-C. The deadline for paper filing is February 28, 2017 and the electronic filing deadline is March 31, 2017. (Electronic filing is required for applicable large employers filing 250 or more employee statements.)
Also in Notice 2016-70, the IRS extended its good faith compliance policy for timely furnished and filed 2016 Forms 1095-C and 1094-C that may contain inaccurate or incomplete information. This relief is only available for timely filed, but inaccurate or incomplete returns. Relief for failure to furnish/file altogether is available only on a showing of reasonable cause, and this is a narrow standard (e.g., fire, flood, major illness).
In addition to covering the new transition relief, this-brief-powerpoint-presentation summarizes some changes in the final 2016 Forms 1094-C and 1095-c, from last year’s versions, and includes some helpful hints for accurate and timely reporting.
Applicable Large Employers have approximately one month, until March 31, 2016, to furnish Form 1095-C to full-time employees in relation to group health coverage offered (or not offered) in 2015. Self-insured employers must also provide Form 1095-Cs to part-time employees who were covered under their plans in 2015. Related IRS filing deadlines (transmittal Form 1094-C and attached Forms 1095-C) come later in the year, but the March 31, 2016 deadline to furnish employee statements is hard and final. The attached PowerPoint presentation lists the Top 10 Rules for Success in completing Applicable Large Employer reporting, and includes bonus tips on opt-out payments, and increased ACA penalty amounts for 2015 and 2016.
On December 28, 2015, the IRS gave Applicable Large Employers (“ALEs”) a last-minute extension of their 2015 ACA reporting deadlines via Notice 2016-4. The original and new, extended deadlines, which apply only to reporting for 2015, are as follows:
The same extensions apply to providers of minimum essential coverage such as insurance carriers and government-sponsored programs (Medicare, Medicaid), who are required to file Form 1094-B and furnish statements to covered individuals on Form 1095-B. Employers generally are not required to perform minimum essential coverage reporting although, as discussed in this prior post, there are circumstances under which it is required.
The extended deadlines are hard deadlines to which the IRS will not apply automatic and permissive extensions of time that would otherwise be available. Notice 2016-4 also functions as the Service’s response to any pending extension requests, which will not be formally granted. Reporting penalties will apply for failure to timely file returns or furnish statements but the IRS may abate penalties on a demonstration of “reasonable cause”; in this regard the employer’s “reasonable efforts” to prepare for timely reporting will be taken into account as will efforts to comply for 2016. Although not exactly clear from the Notice it would appear that the IRS is still offering penalty relief for timely filed and/or furnished but incomplete or incorrect returns and/or statements, where the filer can show that it made good faith efforts to provide complete and correct information. Further clarification on that point would be helpful.
As has often been the case with ACA relief, this extension is offered so close to the original compliance deadlines that some ALEs may not need or even be operationally able to take full advantage of it, and the Notice makes clear that the IRS will be prepared to accept ACA returns beginning in January 2016. However even those ALEs that had already invested substantial time and money in fulfilling the original reporting and statement deadlines were struggling with the complexity of the forms and reporting codes, and the extension will allow for a less frenzied and hopefully more accurate reporting process. The extension will be even more welcome to the many employers who qualified for pay or play relief applicable to ALEs with 50 to 99 full-time employees, including full-time equivalents, and who may only now be learning of their 2015 reporting duties.
As addressed in our prior post, IRS Notice 2015-68, issued on September 17, 2015, describes and requests comments on a number of ACA reporting issues, including several that that the IRS and Treasury Department plan to address in amended or new proposed regulations. Among the points addressed is avoiding duplicate reporting for multiple sources of MEC provided to the same individual (“supplemental coverage”). The Notice describes the current rule for reporting supplemental coverage as “confusing” and outlines a more streamlined alternative. Examples in the Notice describe how it will apply to Health Reimbursement Arrangements (“HRAs”) that are offered together with group health coverage. Note: MEC reporting generally is not required for HRAs, but per recent informal comments by the IRS on a payroll industry conference call, applicable large employers (ALEs) may have to report on HRA coverage that constitutes MEC via Part III of IRS Form 1095-C, under some circumstances.
The proposed new anti-duplication rules, which will apply month-by-month and individual-by-individual, will provide that if an individual is covered by multiple MEC plans or programs provided by the same provider, reporting is required for only one of them. Under this proposed rule, if an individual is enrolled in a self-insured group health plan for a given month and also is takes part in an HRA sponsored by the same employer, the employer, again via Section III of Form 1095-C, is required to report only one type of coverage for that individual (which most likely would be the self-insured group health plan) for that month. If an employee is covered under both arrangements for some months of the year but is covered only under the HRA for other months (for instance, because he or she retires or otherwise drops coverage under the self-insured group health plan), the employer must report coverage under the HRA for those months when it was the only MEC provided.
Under the second proposed anti-duplication rule, reporting generally is not required for MEC for which an individual is eligible only if the individual is covered by other MEC for which MEC reporting is required, so long as the two types of coverage are sponsored by the same employer. This describes the typical “integrated” HRA setting, in which an employer offers an HRA only to employees and dependents who enroll in the employer’s group health plan. In this setting, a self-insured employer can take advantage of the first anti-duplication rule, and need not report the HRA as MEC for months in which an employee is enrolled in both plans. However, an employer that is an ALE and sponsors an insured plan may have a reporting duty. An insured employer that is an ALE need not provide MEC reporting in relation to the HRA for those months in which the employees and dependents are enrolled in the insured plan. However, if an employee is enrolled in an employer’s HRA and in a spouse’s employer’s group health plan, the employee’s employer must provide MEC reporting for the HRA. If the employee’s employer is an ALE the HRA reporting is done via Form 1095-C, Section III. If the employee’s employer is not an ALE it is done by completing Forms 1095-B and 1094-B. In other words, the duty to report MEC coverage provided to non-employees under an integrated HRA applies even to an employer that is not an “applicable large employer” and need not report offers of coverage on Forms 1095-C and 1094-C.
In Notice 2015-68, issued September 17, 2015, the IRS has modified the steps that must be followed by insurance carriers and self-insured employers to demonstrate a “reasonable effort” to obtain Social Security Numbers or other Tax Identification Numbers (collectively, TIN) for family members enrolled in Minimum Essential Coverage (MEC), and has requested public comment on further adjustments to the requirements. Pending future guidance, following the new procedures will entitle the reporting party to “reasonable cause” relief from penalties for late or incomplete tax returns and employee statements.
Internal Revenue Code § 6055 requires that, among other information, TINs for individuals who are enrolled in MEC be reported by MEC providers. Insurance carriers (issuers) report to insureds via IRS Form 1095-B and self-insured employers report to full-time employees on Section III of IRS Form 1095-C. (Forms 1095-B and 1095-C are transmitted to the IRS under Forms 1094-B and 1094-C, respectively. The IRS issued final 2015 versions of these forms, and instructions for same, also on September 17, 2015.) If the reporting party follows the “reasonable effort” steps to obtain a family member SSN/TIN without success, it may report a date of birth for that individual on the applicable form without penalty.
The new steps required to be followed in order to demonstrate that a reasonable effort has been made to obtain an enrolled family member’s SSN/TIN are as follows:
- The initial request is made at the time the individual first enrolls or, if the person is already enrolled on September 17, 2015, the next open enrollment period;
- The second request is made at “a reasonable time thereafter” and
- The third request is made by December 31 of the year following the initial request.
This sequence replaces the sequence described in the preamble to final regulations under Code § 6055: initial request made when an account is opened or a relationship established, first annual request made by December 31 of the same year (or, if the initial request was made in December, by January 31 of the following year), and second annual request made by December 31 of the following year. The Notice states that that this sequence, which was lifted directly from regulations under Code § 6724, the “reasonable cause” relief statute, prompted concerns among reporting parties that it was not practical in the context of MEC reporting.
Until further guidance, it remains the case that reporting a date of birth in one year does not eliminate the need to make the necessary follow-up requests as described in the Notice.