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Bill Enck, CPA

The ACA Penalty Assessment Process is here!


It’s that time of year when the days are shorter, the weather is colder and the holidays are about to begin. Most people begin to make plans for a Thanksgiving gathering and to watch football with family and friends.

The IRS is also getting into the season of giving – in a completely different way. The IRS announced on November 2nd that it will begin to issue formal 2015 Affordable Care Act (ACA) penalty assessment letters to employers before the end of this year. That’s right, the long awaited ACA employer mandate penalty notices are here.

The IRS released a draft of the letter that will be used to notify employers of the proposed penalty assessment. We expect many of the letters may be factually incorrect and urge any employer that receives such a letter to immediately contact a qualified tax advisor for help.

An employer should not try to respond to the IRS by itself as the end result could be an unnecessary penalty assessment, which would not be a deductible expense for tax purposes. It appears that an employer will only be given 30 days from the date of the letter to respond. Failure to respond to the initial letter or failure to provide an authoritative and effective response can really put an employer at a big disadvantage by limiting or removing the appeals process.

What types of employers are most at risk to receiving a penalty assessment?

  • An employer who did not make an offer of employee-only health insurance coverage that met one of the “affordability” safe harbors or did not meet the minimum value requirements.
  • An employer who did not offer health coverage to at least 70% of their full-time employees.
  • An employer who prepared the Forms 1094-C and 1095-C on their own or had a third party (e.g., a payroll company) prepare the forms without reviewing the forms.
  • An employer with between 50-99 full-time and full-time equivalent employees in 2014 and did not indicate as such on the 2015 Form 1094-C.
  • An employer with a large number of variable hour, seasonal or part-time employees in their workforce that did not utilize the lookback measurement method.

The IRS will collect and analyze data from a number of sources before it determines if a penalty assessment is necessary. Two of the more important pieces of data the IRS uses are the actual Form 1094-C and Forms 1095-C.

We have generally stated that an employer is “painting a picture” for the IRS as to whether the employer is subject to the employer mandate penalties by the way they completed the forms. An employer could fall into three different categories related to how well it paints:

  • A picture with clear lines that defines the subject and provides a level of detail where the IRS can accurately determine if it should assess either the “A” or “B” penalty.
  • A watercolor where the colors blend together so it creates a blurry subject and may expose the employer to an unnecessary penalty assessment.
  • An abstract painting where the employer provides inaccurate or incomplete information.

Any type of employer needs to make sure it has the proper supporting documentation on hand to confirm or refute any IRS proposed penalty assessment. An employer who painted a watercolor will probably have more work to do if it truly should not be subject to penalties. An employer who painted abstract art probably has the most work to do and will need to be sure it has the appropriate supporting documentation to request changes to the information provided with the original Form 1094-C and Forms 1095-C.

The employer penalties under the ACA are a tax matter. We have helped employers respond to various tax matter letters and notices for years and have worked with employers and the ACA since the law was enacted. We are very familiar with the ACA and the employer mandate penalties.

We believe any penalty assessment letters will be sent to the individual who signed the Form 1094-C related to the 2015 calendar year. However, all employees in the human resource or finance department should be looking for any correspondence from the IRS and if found, bring it to the attention of the appropriate individual within the organization. An employer will generally only have 30 days to respond to the letter. It doesn’t appear that an employer will be able to request a time extension to respond.

Here is a brief overview of how the IRS approaches the ACA employer penalty process.

  1. Letter 226J 
    a. Issued if the IRS believes an Applicable Large Employer (ALE) owes either the “A” or “B” penalty for at least one month in the 2015 calendar year because at least one full-time employee purchased insurance through the Marketplace and received a premium credit.
    b. Letter will include the following;
    i. An explanation of the employer mandate penalty provisions, aka the Employer Shared Responsibility Payments (ESRP);
    ii. A table summarizing the proposed employer mandate penalty for each month including an explanation as to whether the liability is an “A” penalty or a “B” penalty;
    iii. An explanation of the table summarizing the proposed employer mandate penalty;
    iv. An employer shared responsibility response form, Form 14764, which will be used by the ALE to formally respond to the penalty assessment. The ALE can either agree (i.e., confirm) or disagree (i.e., refute) the penalty assessment. If the ALE disagrees with the penalty assessment, there will be further dialogue with the IRS;
    v. Form 14765 which will contain a list of each full-time employee who received a premium tax credit for a month that the ALE did not qualify for an affordability safe harbor or other relief. The Form 14765 will also include the code combinations the employer entered on lines 14 and 16 of the employee’s Form 1095-C;
    vi. A description of the actions the ALE should take if it agrees or disagrees with the employer mandate penalty included in the letter; and
    vii. A description of what will happen if the ALE does not timely respond to the letter.
    Generally, an ALE will have only 30 days to respond from the date of the letter!
  2. Letter 227
    a. The ALE will receive one of five (5) versions of this letter in response to the ALE’s reply to the initial letter.
    i. If the ALE disagrees, the ALE can request, within 30 days of the receipt of this letter, a pre-assessment conference with the IRS Office of Appeals.
  3. Notice CP-220J assessing penalty and making notice and demand for payment.
    a. Issued if ALE does not respond to the initial letter 226J or agrees to the initial penalty assessment.
    b. Issued if the ALE cannot get the IRS to agree that no penalty applies based on prior attempts to reduce or eliminate the penalty assessment during the process outlined above.

We have worked with employers in the past who either expect to receive a penalty assessment related to the “A” penalty or “B” penalty and those that do not expect to receive a penalty assessment. We have also worked with employers who had us review the Forms 1094-C and 1095-C before they were provided to the IRS.

In some cases the Form 1094-C or Form 1095-C contained accurate information and in other cases they contained inaccurate information before our review. Fortunately, we caught the incorrect information before the forms were provided to the IRS. It will be interesting to see how well employers completed the forms and how well the IRS was able to collect data from multiple sources and calculate a penalty assessment.

We can help.

If you receive a Letter 226J from the IRS or any other correspondence regarding the ACA, contact Bill Enck or Roger Prince immediately.