Employers Should Prepare Now for ACA Subsidy Appeals

Subsidies wrongly granted will trigger employer penalties; 90 days to appeal

Stephen Miller, CEBS By Stephen Miller, CEBS September 9, 2015
Update: Watch for Exchange Subsidy Notices

Starting in July 2016, employers with 50 or more full-time employees (or part-time equivalents) should be on the lookout for exchange subsidy notices alleging that a full-time employee received subsidized coverage on an exchange after the employer failed to provide qualifying coverage. Those notices are being sent from the ACA's Health Insurance Marketplace, which provided this sample.

To contest the notice, an appeal request form must be submitted within 90 days of the notice date.

To avoid penalties, it will be necessary to show that qualifying coverage was offered to the employee, which is why employers should have a system in place for tracking and recording health benefits.

Employers subject to the Affordable Care Act (ACA) coverage mandate “will have to appeal an unexpectedly large number of errant subsidy certifications in early 2016, while the IRS will be contacting these same employers about taxes purportedly triggered by those errant certifications,” warned R. Pepper Crutcher Jr., leader of the ACA practice group at Jackson, Miss.-based law firm Balch & Bingham, in an interview with SHRM Online.

The ACA and its enabling regulations state that:

Applicable large employers (those with 50 or more full-time employees and equivalents in the prior year’s average month) will be exposed to nondeductibles taxes for every employee who receives a tax credit subsidy to purchase health care on a public exchange (typically through the Healthcare.gov gateway to federal and state exchanges).

Subsidies are available to low-to-moderate income employees whose employers failed to provide affordable health coverage that meets at least the minimum coverage requirements under the ACA. Affordability generally means that self-only coverage would cost the employee no more than 9.5 percent of his or her W-2 wages.

Crutcher explained that the healthcare.gov website, as originally conceived, was “to immediately notify applicants, their purported employers and the IRS as soon as a subsidy is granted. Employers then have 90 days to appeal the decision” by showing, for instance, that the employees were offered at least one policy that satisfied the affordable minimum coverage criteria.

Unfortunately, he pointed out, “neither the department of Health and Human Services [HHS] nor the IRS will have the data needed to dispute false subsidy applications before employers file their Forms 1095-C,” through which employers verify their compliance with the “shared responsibility” coverage mandate. While the open enrollment period begins in the fall of 2015, an employer’s Form 1095-C and related forms are due Feb. 29, 2016, if paper forms are filed (available only to employers with fewer than 250 employees on a controlled-group basis) or by March 31, 2016, if filing electronically.

“Uninsured part-time employees, contractors and temps might have received subsidies, claiming to be full-time employees. Employers won’t know until they finally see the certification notices,” Crutcher said.

Watch for Certification Notice Letters

Right now, “there is virtually no verification” required on the government’s part before granting tax credit subsidies, Crutcher pointed out. Employees are certified to receive coverage subsidies based on their own statements, which can simply involve calling the Healthcare.gov helpline and attesting that their employer failed to provide affordable minimum value coverage.

Virtually no verification is required before granting
coverage subsidies that trigger employer penalties.


A description of the employer appeals process of subsidy certification doesn’t appear on the Healthcare.gov website or anywhere else, Crutcher said. “And they won't tell us when it's going to be there or anywhere else,” which makes planning to appeal erroneously granted certifications difficult.

Moreover, “Employers right now are scrambling to figure out how they're going to file their Forms 1095-C. They’re not even thinking about this. But someday, some envelope is going to come from goodness knows where, looking like goodness knows what, addressed to goodness knows whom in an employer’s organization. And it may have a nice little Healthcare.gov logo on it, and it may get thrown in the trash as junk mail. And because that envelope was not recognized as a notice of advanced premium tax credit [APT] determinations that must be appealed within 90 days, that employer will next hear about the subject from the IRS when it contacts the employer about being assessed Section 4980H taxes.”

Crutcher gave the following scenario as a warning:

ACME Corp. makes an offer of coverage that would have cost an employee $270 per month ($3,240 per year). The employee earns $35,000, which means the coverage is affordable under the 9.5-percent-of-wages rule. But the employee doesn't want to pay $270 per month and has heard that he can call Healthcare.gov, tell the call center representative that his employer’s offer of coverage wasn’t affordable, and—with no questions asked or verification needed—be certified to buy a policy with a subsidy that would cost him just $30 per month.

“So what is he going to do? A lot of employees are going to go to Healthcare.gov and buy the $30-per-month policy with a subsidy,” Crutcher said.

Healthcare.gov will tell employees that if they are wrongly subsidized, they have to repay the subsidy. But “there are tight limits on what employees can be required to pay back, and employees are hearing that the maximum amount the IRS can force somebody to repay typically is far less than they would gain in a year by getting a subsidy for which they’re not qualified,” Crutcher explained.

Then, he continued, this happens:

Sometime—maybe December 2015, January 2016 or February 2016, we just don't know—ACME is going to get an envelope, we think from Healthcare.gov. Will it say plainly, ‘Important legal information, notice of APT certification, 90 days to appeal’ on the front of the envelope, so that somebody who doesn't know what’s going on might think this is important and he or she better get this to HR? Or will it just be like any other communication from Healthcare.gov, which may look to some recipient at ACME like a piece of junk mail?

If ACME doesn't appeal the subsidy certifications that are in that notice within 90 days, “The IRS will then assume, because there's been no appeal and no reversal, that those certifications are correct. And if those people have attested to being full-time employees of ACME Corp. not offered affordable minimal essential coverage, then the IRS is going to contact ACME Corp. sometime afterward about the tax assessment,” which is how ACME Corp. first learns it has a big problem on its hands.

After that, “you're into an IRS administrative process about tax assessments and appeals. And, by the way, the IRS hasn't told us specifically what that process will be, either. But you can bet it will be more formal and more taxing then simply appealing through Healthcare.gov the original certifications” within the 90-day period, Crutcher noted.

ACME is in this bind “because it didn't recognize what it received from Healthcare.gov, which would have given it the opportunity to appeal within 90 days of receiving the certifications notice,” Crutcher observed.

Advice to Employers

The obvious advice is to inform staff and HR to be on the lookout for certification subsidy notice letters, Crutcher said, but it’s more complicated than that. For example, if an employer receives a certification notice letter and identifies it as such, should it open the envelope at all?

“Because if you open that envelope and you find out the names of your employees that have been subsidized to buy insurance with the subsidy, every one of those employees will then be protected from subsequent adverse action exactly the same way that Sarbanes-Oxley securities fraud whistle-blowers are protected,” Crutcher said. In other words, if they’re fired, they may sue.

“The rules include very prompt reinstatement and damages, and it’s a deck very much stacked in favor of the whistle-blower,” he warned. “If you can take action against those employees, you will have the burden to prove that their subsidy certification was totally unrelated to the action.”

“So maybe you'd rather not know. But if you don't know, how do you appeal?” he remarked.

In Crutcher’s view, contacted employers ought to be forwarding those letters to their attorneys.

On receiving the forwarded, unopened envelope, outside counsel “ought to review the subsidy certifications, determine which ones are erroneous, appeal the erroneous certifications and not tell the employer which employees are listed on those notices,” Crutcher said. “The outside counsel ought to give the employer only aggregate data about appeals taken and appeals not taken.”

Involving outside counsel in this way would enable an employer that is sued to say its adverse action against the employee was not based on the employee receiving a subsidy, because it didn't know the employee had been certified to receive a subsidy.

At this point, “You can bet that [the government] is going to require the employer to prove it didn't know,” Crutcher noted.

So how does the employer prove this? “It should have a documented process in place,” Crutcher advised. This would allow the employer to say, “Here's the process, and we followed it to a T. We never opened the envelope. We logged it in, and then sent it by FedEx with a tracking number to our outside counsel, who logged its receipt,” he explained.

Of course, this scenario still hinges on being able to identify the envelope when it arrives in the mailroom. “We'd like HHS to show us what the boilerplate form notice letter looks like,” Crutcher said. “Give us an image of the envelope you're going to mail it in, so we can tell our clients what to be looking for. We understand HHS is still working on this and it might change, but at least show us what they look like now, so we can start helping our clients prepare.”

He expects that this information will be available around November 2015, “unless HHS decides to let us see an early draft form.”

Crutcher wrote about this matter in a September 2015 post, “Outside Counsel Should Handle Healthcare.gov Subsidy Appeals,” on his firm’s Affordable Care Act Review blog.

Related SHRM Articles:

2017 ACA Information Reporting: Prepare Now for Earlier Deadlines, SHRM Online Benefits, July 2016

IRS Eases Penalties for Late ACA Reports, SHRM Online Legal Issues, July 2016

Respond Quickly to New Marketplace NoticeSHRM Online Legal Issues, July 2016

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow me on Twitter.

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