The Treasury Inspector General for Tax Administration (TIGTA) issued results from its audit of the IRS’s implementation of key Affordable Care Act (ACA) provisions.
The ACA established several obligations affecting Applicable Large Employers (ALEs) (generally, employers that employed 50 or more full-time and full-time equivalent employees in the prior calendar year). Among other things, ALEs are required to determine for each month which employees are full-time employees under ACA definitions; offer qualified health coverage within a specified time of employees becoming eligible; ensure that such coverage meets ACA affordability measures; and report to the IRS whether they offered each full-time employee (and any spouse and dependents) minimum essential coverage (MEC) under an eligible employer-sponsored plan. These annual reports detail, on a monthly basis, whether employees were offered coverage and whether such coverage met affordability measures, or if the employer was not liable for an Employer Shared Responsibility Payment – for example, if an employee was not employed during a month. For self-insured employers, IRS Forms 1095-C also identify all persons covered under the plan (e.g., spouses and dependents) and months of coverage.
This annual reporting is necessary to enable the IRS to calculate potential Employer Shared Responsibility Payments (ESRP). For 2016, ALEs that fail to offer health coverage to at least 95% of their full-time employees are liable for an ESRP of $2,160 times the total number of full-time employees, minus 30. ALEs that met the 95% threshold may still be liable for an ESRP of $3,240 for any employee who received subsidized health coverage through a Marketplace organization; if the employer coverage does not meet affordability standards. Assessment amounts are indexed annually. For 2017, the payment amounts are $2,260 and $3,390 per full-time employee, respectively.
What the TIGTA Report Reveals
Although employers have now concluded ACA reporting for 2015 and 2016, the IRS has not yet issued any proposed ESRP notices. The TIGTA report analyzed the IRS’s preparations to issue these notices, and explained that the IRS has not yet issued ESRP notices for a number of technical and other reasons. For example, despite electronic filing requirements that apply to submissions of 250 or more statements, a significant volume of paper reports was received, and the processing of paper reports was delayed. For example, as of October 28, 2016, approximately 1.4 million paper Forms 1095-C had not yet been processed.
Additionally, certain validation criteria did not work as planned, resulting in incorrect error codes, or no error codes when an error condition was actually present. Finally, certain systems that were needed to determine accurate Employer Shared Responsibility Payments were delayed. One such system was delayed until May 2017.
This Means for Employers
The TIGTA report affirms that proposed IRS ESRP notices should be expected in the coming months for the 2015 reporting year. Consequently, large employers that are subject to the Employer Shared Responsibility provisions should prepare to analyze and respond to proposed IRS notices. Proposed ESRP notices for 2016 should also be expected later this year, although timing remains uncertain.
These proposed notices are expected to identify employees who received federally subsidized health coverage through a state Marketplace. Employers may need to respond to the IRS with details if they believe that a proposed assessment is incorrect – for example, if the individuals were not employed, were not full-time employees or received an offer of coverage which met affordability standards. If an employer does not respond to correct any inaccuracies, the IRS will deem the proposed amount to be final and subject to collection action.
Further, employers should continue necessary analysis and record-keeping tasks, including:
• Determining for each month which employees are full-time employees under the Act
• Offering qualified health coverage as employees become eligible
• Periodic testing to ensure that such coverage meets ACA affordability measures
• Responding to Marketplace verification requests
• Verifying that the employer has SSNs/TINs and names of all dependents and spouses, or soliciting any missing names and SSNs/TINs
• Ensuring their readiness to furnish to employees and electronically file with the IRS Forms 1094C and 1095-C for 2017
Information Reporting Penalties May Also Apply
Significant IRS penalties may also apply for failure to file timely and correct information returns (under IRC Section 6721) or failure to furnish accurate statements to employees (and for self-insured employers, covered persons) by the applicable deadline (IRC Section 6722). The penalty for a failure under either IRC Section is currently $260 per statement; potentially $520 per statement if both sections apply, up to a maximum of $6,357,000 annually. These amounts are also indexed and may change annually. Penalties can apply for non-filing, late filing, filing in non-electronic form, or incorrect information.
IRS Notice 2016-4 confirmed that employers that did not comply with the reporting requirements remain subject to penalties under Code Sections 6722 or 6721, but encouraged employers to nonetheless furnish and file, because the IRS will take such furnishing and filing into consideration when determining whether to abate penalties for reasonable cause. The IRS will also take into account whether an employer made reasonable efforts to prepare to furnish and report the required information, such as gathering and transmitting the necessary data to an agent to prepare the data for submission, or testing its ability to transmit information to the IRS. In addition, the IRS will take into account the extent to which the employer is taking steps to ensure that it is able to comply with the reporting requirements for future years.