Be Ready for More ACA Penalties

Allen Smith, J.D. By Allen Smith, J.D. August 30, 2018
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The recent barrage of letters sent by the IRS proposing penalties under the Affordable Care Act (ACA) may be petering out, but a new round is expected later this year. Employers need to be prepared.

Several lessons can be learned from the more than 300,000 proposed-penalty letters sent by the IRS this summer and late last year for alleged violations of the ACA's employer mandate in 2015. The proposed penalties for some large employers amounted to more than $1 million each, noted Mark Spittell, managing director at KPMG's Compensation & Benefits Practice in Dallas. He expects the 2016 assessment letters will be issued before the end of 2018.

Penalties Are Proposed, Not Final

The proposed-assessment letters, called Letters 226J, are preliminary employer shared responsibility payment (ESRP) assessments—but these are not final assessments, emphasized Ed Bernard, an attorney with Hanson Bridgett in San Francisco. Some employers have assumed that they were final determinations, he said, and have agreed to a proposed assessment by filing Form 14764, ESRP Response, without:

  • Reviewing the IRS calculations.
  • Checking their records.
  • Consulting with benefits attorneys.

Once an employer agrees to the assessment, the IRS will assess the penalty and the options for challenging it become much more limited, he said. Thoroughly review the proposed assessment, reporting forms, exchange premium tax credit notices and other records to ensure that the proposed penalty is correct, he recommended.

Assessments Can Be Challenged

Some employers incorrectly assume that the IRS cannot be challenged, Spittell said, but "The IRS proposed assessment can and should be challenged if based on erroneous information."

Most assessments relate to errors on reporting forms, and the IRS has been willing to reduce the penalties if the employer provides an explanation to the IRS regarding the errors, observed Katie Bjornstad Amin, an attorney with Groom Law Group in Washington, D.C.

Under the ACA, employers with 50 or more full-time employees must submit Form 1094-C to the IRS, along with Form 1095-C; these forms contain information about their employees' health coverage. Form 1095-C also is sent to full-time employees. A reporting error on one of these forms may result in a proposed penalty.

One example would be an employer that incorrectly indicated on Form 1094-C that it did not offer minimum essential coverage to at least 70 percent of its employees for a particular month for 2015, Christina Broxterman and Christopher Guthrie, attorneys with Ogletree Deakins in Atlanta, noted in a joint comment. (For 2016, the 70 percent threshold increased to 95 percent.)

[SHRM members-only toolkit: Complying with and Leveraging the Affordable Care Act]

Reporting errors may also occur on Form 1095-C. The IRS may provide the employer with a list of employees who, in the absence of being offered minimum essential coverage from the employer, received a premium tax credit. The list shows the months for which a premium tax credit was received and what codes were reported on Form 1095-C for each of these employees.

Often, employers realize that the employees on the premium tax credit list were simply assigned incorrect codes for certain months on Form 1095-C, Broxterman and Guthrie said. For example, an employer may have failed to put in a code showing that an employee was not a full-time worker in a certain month. In response to the assessment letter, employers can provide correct codes for the premium tax credit listing, making a reduction in penalties more likely, they said.

The IRS is not asking for information on every one of a large employer's full-time employees, just those on the premium tax credit list, they added.

Corrections to Forms Not Necessarily in Order

Broxterman and Guthrie noted that employers that receive assessment letters for 2015 do not need to issue corrected Forms 1095-C to affected employees. "In fact, the letters specifically say that the employer should not do so," they pointed out.

In responding to Letters 226 for 2015, some employers have realized that their Forms 1094-C and 1095-C for 2016 contain errors. "There is confusion as to whether employers should amend their 2016 forms or wait until they receive a Letter 226J [for 2016] and respond as they did for 2015," Broxterman and Guthrie observed. Many employers are taking a wait-and-see approach. They plan on responding to Letter 226J for 2016, expected later this year, and providing any necessary corrections at that time.

"Informal conversations with the IRS have supported that practical approach, although there are some risks due to the lack of clear guidance," they said.

Penalties Are Here for Now

The House of Representatives Ways and Means Committee has approved legislation to suspend penalties for the employer mandate for 2015 through 2019, reports The Hill. But the legislation has not yet advanced further.

"When the Affordable Care Act was being debated, SHRM [the Society for Human Resource Management] opposed the employer mandate provision of the legislation as it would limit employers' flexibility and innovation," noted Lisa Horn, SHRM's vice president of congressional affairs.

Said Spittell: "Some believe they can ignore the assessment notices because they believe they are not subject to the penalty or that the ACA will be repealed. This is a mistake. Failing to timely respond to a notice will result in the IRS making the assessment based on the information [it has]. Ignoring the IRS assessment is not an effective strategy."

Employers that received an assessment notice for 2015 should look at their 2016 and 2017 reporting to see if they can expect additional notices, said Tabatha George, an attorney with Fisher Phillips in New Orleans. She recommended that employers check their address on Form 1094-C because this is where the penalty letters will be sent. "Make sure the right person is receiving it," she said.

The IRS continues to refine this penalty process, and it doesn't look like the assessment letters are going away anytime soon, so being aware of them is important, she concluded.

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