The IRS has started sending out ESRP notices (Letter 226-J) to employers for the 2018 tax year. Letter 226-J is the initial letter issued to Applicable Large Employers (ALEs) to notify them that they may be liable for an Employer Shared Responsibility Payment (ESRP) under Penalty A or B. The determination of whether an ALE may be liable for an ESRP and the amount of the proposed ESRP in Letter 226-J are based on information from Forms 1094-C and 1095-C filed by the ALE and the individual income tax returns filed by the ALE’s employees.
UNDERSTANDING PENALTY EXPOSURE FOR EMPLOYERS
Penalty A: Not offering minimum essential coverage to employees
The expectation is that ALEs will extend an offer of coverage that is at least MEC to at least 95 percent of their full-time employees and dependents. Those who don’t face an Employer Shared Responsibility Payment commonly referred to as Penalty A.
To avoid Penalty A is to accurately determine who must be considered full-time and therefore eligible for benefits under the ACA. Under the ACA guidelines, any employee who average 30 hours a week or 130 hours a month is considered a full-time employee and the employee, and their dependents should be offered coverage following 90days of hire. If the employer is unable to determine if the employee will work at least 130/hours a month, then the employee is classified as a variable-hour employee. Variable hour employees’ hours are tracked over a period to determine their eligibility for coverage. Employers have two options to track these employees using the monthly or look back measurement period.
For 2021, the financial impact of a Penalty A violation is $2,700 per full-time employee. The penalty is assessed for each month an eligible employee is not offered coverage. There is no penalty for the first 30 full-time employees, with the credit applied consistently across all ALE Members within a reporting control group.
Example:
Corporation A is an ALE group and has 6,000
Penalty A Explained: (6,000 FT employees – 30 employees) x 2021 penalty A $2,700= $16,119,000 (annually)
Penalty B: Employers that offer coverage to their full-time employees, but it does not provide minimum value, or the plan is unaffordable
Employers are subject to fines if they fail to offer affordable coverage that provides at least minimum value coverage and therefore is considered a qualified health plan to their full-time employees, even if the ALE does not offer at least 95 percent of its full-time employee’s coverage. If at least one of the full-time employees receive a premium tax credit through the Health Care Marketplace, the employer is therefore at risk for paying a portion of the Employer Shared Responsibility payment which is known as Penalty B.
Penalty B is calculated for each full-time employee who was not offered affordable minimum value coverage by the employer and they went to the Healthcare Marketplace and qualified for a premium tax credit. For 2021 the penalty is $ 4,060 penalty per year multiplied by the total number of full-time employees who receive a premium tax credit or subside from the exchange. Just like penalty A, this penalty is assessed each month that and eligible employee is not offered coverage.
Example:
Corporation A is an ALE group and has 6,000
Penalty B Explained: 2021 Penalty B $4,060 x full-time employees who received a premium tax credit 150 = $609,000 (annually)
Penalty B penalties are capped at Penalty A maximum, so a company will not need to pay more than they would have been assessed for not offering any coverage.
While penalty A and B have the most significant financial implications, they are not the only penalties a employer could be exposed to in terms of ACA compliance. For example, if an employer fails to deliver copies of the forms 1095-C to all employees by March 2nd, 2021, they could be at risk of a fine of $250 per form. If the IRS finds that failure was intentional the fine is $ 560 per form.
WHAT DOES THIS MEAN FOR EMPLOYERS?
If you receive this notice that means that at least one or more of their full-time employees received a penalty tax credit (PTC) from the healthcare exchange. Employers should read the letter carefully. The notice provides an explanation of ESRP process and computation of the penalties. It also provides a monthly breakdown of the PTC listing for each employee who received a PTC by month. Employers should do the following:
- Read the ESRP notice carefully.
- Provide a timely response to the notice on whether you agree or disagree with the notice.
- If you disagree, provide a full explanation on why you disagree with a full explanation.
- If you agree, then follow the instruction outlined in the notice to submit payment to the IRS.
IF AN EMPLOYER DISAGREES, WHAT SHOULD THEY CONSIDER?
- Review the information provided on the 1094 and 1095-C forms for each employee. Ensure that the correct 1 series code were reflected on line 14 and the correct 2- series codes were reflected on line 15 of the 1095-C form.
- Check the 1094-C counts to make sure the correct full-time counts were provided and confirm that at least 95% full-time were offered coverage that met minimum essential coverage that meets minimum value.
- Review the measurement period hours for each employee to determine if they average 130/hr a month to be eligible for full-time coverage.
- Review the affordability cost based on the safe harbor option (W-2, rate of pay, FPL) chosen to ensure that the medical plan offered does not exceed the plan cost limit.
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