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Roger Prince

ACA Employer Mandate Penalty process grinds on


Yes, the Republicans did manage to repeal the Affordable Care Act (ACA) individual mandate (effective in 2019) with last year’s tax legislation. However, the ACA’s employer mandate provisions remain intact, and we don’t see any indication that will change anytime soon. Therefore, employers need to keep abreast of the penalty process and the employer mandate requirements going forward. This article focuses on the penalty process.

The IRS began issuing Letter 226J this past November, based on the Forms 1094-C and 1095-C filed for the 2015 calendar year. Letter 226J outlines the initial proposed penalty assessment of the ACA’s Employer Shared Responsibility Payments (aka the “proposed penalty assessment letters”).

The big takeaway: the 2015 Employer Shared Responsibility Payment penalty process has only just begun.

There are likely many more 2015 proposed penalty assessment letters to come. In addition, there will be follow-up requirements for any organization that has responded to a proposed penalty assessment letter. The IRS must evaluate the response to the initial proposed penalty assessment before making any adjustments.

The proposed penalty assessment letters appear to come in separate waves with these common characteristics. All of the letters thus far:

  1. Involve only filings for the 2015 calendar year,
  2. Assess only the so-called “A” penalty,
  3. Provide a list of employees who procured health insurance from the ACA marketplace (aka ACA exchange) and received a premium credit related to the coverage purchased from the ACA marketplace.

Most of the current proposed penalty assessment letters we have seen assess the “A” penalty based on incorrect facts. The “A” penalty arises when not enough full-time employees receive an offer of minimum essential coverage. The errors we have seen thus far have been either incorrectly filled out 2015 Form 1094-Cs, or the IRS computer system somehow changed Form 1094-C data as it was uploaded (yes, this really happened in a number of cases.) In both cases, the Form 1094-C incorrectly reported that proper offers of coverage were not made. Luckily, many employers have had a relatively easy time responding to the proposed penalty assessment letter by simply pointing out the error(s) on the 2015 Form 1094-C.

We believe that the IRS will accept most employer responses that accurately argue that the assessed “A” penalty is incorrect.

Unfortunately, that will not be the end of the story. Remember that every proposed penalty assessment letter has a list of employees who received a premium credit for the coverage purchased from the ACA Marketplace. We believe the IRS will issue a revised penalty assessment letter to an employer indicating that they are assessing the so-called “B” penalty. The “B” penalty generally applies when a full-time employee — who purchased coverage from the ACA Marketplace and received a premium credit — doesn’t receive an affordable offer of coverage using the safe harbors (i.e., Form W-2, Rate of Pay, Poverty Line safe harbors). Whether or not the employer made an affordable offer of coverage is reported via the 2015 Form 1095-C filed by the employer for the employee in question.

Responding to a letter from the IRS regarding the “B” penalty may be more complicated than responding to the “A” penalty, because the “B” penalty is more complicated and fact driven. Every employee’s facts could be different regarding affordability. We believe the IRS is already working under the assumption that the employees in question (i.e., listed on Form 14765, included in the initial letter) qualified for the premium credit because the employer did not make an “affordable” offer of coverage. This means the employer must prove that they made an affordable offer of coverage to the employee. As such, the IRS may require an employer to provide more supporting documentation to eliminate a “B” penalty assessment than it did for the “A” penalty assessment.

Some employers responded to the proposed penalty assessment letter on their own or through the service provider who prepared their 2015 Forms 1094-C and 1095-C (e.g., the payroll provider). Such action may have been appropriate for the initial proposed assessment but if the IRS responds with a revised penalty assessment, it’s probably time to seek the assistance of a qualified tax advisor familiar with the ACA’s employer mandate provisions. This could be your current accounting or law firm, provided they have ACA experience.

Just a few weeks ago, the IRS issued a draft of the Notice (i.e., Notice CP220J) it intends to issue to employers who fail to convince the IRS that neither the “A” nor “B” penalty applies for 2015. This is an actual notice of a tax assessment and will almost certainly require an employer to consult with a qualified tax advisor. At this point, an employer must either pay the penalty or appeal the penalty assessment. Fighting such a notice will cost time and money. The best way to prevent the receipt of such a notice, is to respond to any proposed penalty assessment letters in a timely manner and provide a complete and accurate response to the IRS.

Employers should not think the game is over if they or someone on their behalf has responded to the proposed penalty assessment letter. If the IRS responds with another letter claiming a “B” penalty assessment exists or with a penalty assessment by means of a Notice, then it’s game on. Speak immediately with a qualified tax advisor and make sure you give yourself the best chance to abate any penalty assessments.