Skip to Main Content

blogpost

ACA employer mandate penalty notices: Don't panic!

06.13.17

Four steps to take if you get an ACA Tax Penalty Notice from the IRS

It’s been almost a year since the IRS filing deadline for 2015 Forms 1094-C and 1095-C. Most expected the IRS to issue employer penalty notices related to the 2015 calendar year in late 2016. To date, the IRS has not issued a single penalty notice. Employers who did not comply with the law are subject to penalty and there is a good chance that the IRS will issue 2015 penalty notices soon. So what do you need to do?

If your company receives an ACA penalty notice, you should follow these steps:

  1. Scrutinize the information closely — do not assume the IRS claim is accurate
  2. Be ready to refute the IRS’s claim — be sure to gather all of the pertinent facts
  3. Do not forego your appeal rights — consult with outside tax experts or your legal team to make sure you understand them
  4. Contact a tax specialist for guidance — preferably one with ACA and IRS experience

The fate of the ACA is unknown, but the repeal legislation passed by the House in early May retained the employer mandate penalties for 2015. Thus, there is a good chance that any future repeal legislation will also retain the employer penalties for 2015 — and possibly 2016 and 2017.

The bottom line?

Don’t panic, be prepared, and get outside help if you need it. For more detailed information on ACA Tax Penalty notices, read the article here. If you need specific information or help with your penalty notice, please contact Bill Enck or Roger Prince.

Related Services

Consulting

Business Advisory

A penalty letter doesn’t mean the IRS is correct, but it’s important you know what to do to avoid paying an erroneous penalty. 

As we’ve written about recently, the IRS has sent out penalty letters to businesses, non-profits, and government agencies indicating they are not in compliance with the ACA employer mandate for 2015.

The letters usually take the position that the employer owes a penalty based on information examined by the IRS, unless the employer can prove otherwise. This puts employers on the defensive, often based on incorrect facts.

Letters we’ve reviewed all assessed significant penalties against the employers. In two of the cases, penalties were more than $500,000. In these cases it appears that companies incorrectly stated that they didn’t offer health insurance coverage to at least 70% of full-time employees. Given the potential penalties involved, you cannot risk a sub-standard response to the IRS.

Because the process is new and there are many unknowns, including IRS errors in processing and interpretation of the forms, be prepared. If your company receives a penalty letter, here’s what we recommend to get you on the right track for working through the process:

  1. Find and review your original 2015 Forms 1094-C and 1095-C that you or your payroll company submitted to the IRS.
  2. Determine when you must respond to the IRS. You have 30 days from the date on the penalty notice letter to file a response.
  3. The employer penalties and how to address them are a tax matter. Get qualified tax advice from an outside expert who understands both tax and the ACA. Fortunately, we meet those criteria and would be delighted to help you. 

Even if you don’t receive one of the first penalty notices, it’s wise to keep abreast of the ACA issues. Sign up here to receive alerts from our tax and ACA experts. Questions? Contact me or Bill Enck for more information.

 

Blog
Guilty until proven innocent? ACA employer penalty letters are here.

Are you spending enough time on your paid time off plan?

Many questions arise regarding paid time off (PTO) plans and the constructive receipt of income, which can cause payroll complications for employers and phantom income inclusion for employees. In order to avoid being subject to penalties for not withholding income and payroll taxes and having employees be subject to tax on cash they have not received, certain steps need be followed if an employer wants to properly allow employees to cash-out PTO.

What the IRS is looking for.

The Internal Revenue Service (IRS) has issued a number of Private Letter Rulings (PLRs) that examine earned time cash-out programs. While such rulings don’t serve as precedent, it appears the IRS has come up with the following factors that it deems important in order to avoid constructive receipt in a PTO cash-out situation:

  1. Employees must make a written election before the end of December in the year prior to the year they will be earning and receiving the accrued earned time to be cashed-out.  This is an election to receive a cash payout of the earned time to be accrued in the following year.
     
  2. The election must be irrevocable.
     
  3. The payout can only happen once the employee has actually earned and accrued the earned time in the following year. Payouts are generally once or twice per year, but may happen more frequently.

The IRS appears to generally require that the earned time being paid out be substantially less than the accrued earned time owed to the employee. This is to ensure that the earned time program remains a bona fide sick or vacation pay plan and not a plan of deferred compensation. This particular requirement can get tricky and may be different in each employer’s case.

Why does it matter?

The danger of failing to follow IRS guidelines regarding earned time cash-outs is that the IRS could claim that the employees offered a choice to cash-out are in constructive receipt of their accrued earned time balances regardless of their choice. This would result in immediate taxation of all accrued amounts to the employees, even if they hadn’t received the cash. The employer would also be subject to penalties for not properly withholding federal and state taxes.

It is important to review your PTO plan to be sure there are no issues regarding constructive receipt and to make sure your payroll systems are correctly reporting income.

The IRS issued proposed regulations under Code Section 457 in June of 2016 regarding, in part, non-qualified deferred compensation plans of not-for-profit (NFP) organizations. Those regulations contain guidance regarding the cash-out of sick and vacation time and the possibility that certain cash-out provisions may create a plan of deferred compensation and not a bona fide sick leave or vacation leave plan. As noted above, such a determination would be disastrous as all amounts accrued would become immediately taxable. NFP organizations and their advisors should keep a close eye on the proposed Section 457 regulations to see how they develop in final form. Once the regulations are finalized, NFP organizations may need to make changes to their cash-out provisions.

Please note that the above information is general in nature and is not meant to provide guidance on any particular case. If you have any questions about your PTO plan, please contact Roger Prince or Bill Enck.

Blog
Paid time off plans: IRS guidelines and why they matter

This site uses cookies to provide you with an improved user experience. By using this site you consent to the use of cookies. Please read our Privacy Policy for more information on the cookies we use and how you can manage them.