IRS Employer Mandate Penalty Assessments Begin (Benefit Minute)
The Internal Revenue Service (IRS) has begun assessing Affordable Care Act (ACA) employer mandate penalties for 2015 by sending certain employers Letter 226J, the preliminary tax penalty notification letter.
Section 4980H of the Internal Revenue Code implements the ACA’s employer mandate, which subjects Applicable Large Employers (ALEs) to a monthly penalty for 2015 if:
- Minimum Essential Coverage (MEC) was not provided to “substantially all full time employees” and at least one full time employee obtained a premium tax credit (penalty of $174 per month per full time employee applies) or
- MEC offered to substantially all full time employees did not provide minimum value, was not affordable (as defined by the ACA) or was not offered to one or more full time employees when the impacted employee or employees received a premium tax credit (penalty of $260 per month per impacted employee applies)
For 2015, “substantially all full time employees” was defined as at least 70%, determined on a month-by-month basis. For plan years beginning in 2016, this threshold was raised to 95%. Additionally, many medium-sized ALEs (less than 100 full time equivalent employees) were not subject to penalties in 2015. Information regarding an ALE’s compliance with these requirements was reported on Form 1094-C and Form 1095-C. These forms were due to the IRS by June 30, 2016 for the 2015 reporting year.
Contents of the Tax Notification Letter
Letter 226J provides background on the ACA penalty (referred to as an Employer Shared Responsibility Payment or ESRP), an explanation as to why the IRS believes the employer owes an ESRP and the proposed ESRP amount. It also states action to be taken whether the employer agrees or disagrees with the proposed ESRP.
Other information provided with Letter 226J includes:
- ESRP Summary Table which itemizes the proposed ESRP by month
- Explanation of the ESRP Summary Table
- Publication 1 which informs taxpayers of their rights and includes information on the examination and collection processes
- Notice 609, Privacy Act Notice
- ESRP Response (Form 14764) which must be signed and returned within 30 days whether or not the employer agrees with the proposed ESRP
- Employee Premium Tax Credit Listing (Form 14765) which shows the name and truncated social security number of each employee for whom the IRS is assessing a proposed ESRP.
An employee will be included on the Employee Premium Tax Credit Listing if a Form 1095-C was filed for the employee, the employee was allowed a premium tax credit for one or more months of 2015 and the employer did not report any safe harbor or other relief for the month or months the employee received the premium tax credit. This Form will list the line 14 offer of coverage code and line 16 safe harbor code (if any) that the employer filed on the Form 1095-C. Employees on this list are referred to as assessable full time employees.
Letter 226J specifically states that the ESRP is not deductible for income tax purposes.
How an Employer Should Respond
If the employer agrees with the proposed ESRP, the employer should complete the ESRP Response and return it with payment. Electronic payment is also permitted.
Many employers will not agree with the ESRP and will find that reporting errors on Form 1094-C and/or Form 1095-C have resulted in the ESRP assessment. In these cases, the employer
must still return the ESRP Response and include a signed statement explaining why the employer disagrees with all or part of the proposed payment. Documentation supporting the statement must also be submitted. This may include proof of an offer of coverage, affordability, and minimum value. If the employer wants to change information provided on lines 14 and 16 of the Form 1095-C because the original information was inaccurate or incomplete, this should be done directly on the Employee Premium Tax Credit Listing and submitted with all other documentation. The employer should not file a corrected Form 1094-C or Form 1095-C. The IRS will review the information provided and then contact the employer via one of five versions of Letter 227. If an employer continues to disagree with the ESRP assessment, the employer may request a conference with the IRS Office of Appeals.
The 226J Letter will include a response date, which will be approximately 30 days from date of receipt. In order to provide documentation demonstrating the employer is not subject to an ESRP, information will likely have to be gathered from various departments, including human resources, benefits, payroll and finance as well as outside vendors in a short amount of time. In anticipation of this data collection effort, any employer with concerns about a potential ESRP assessment should begin taking an inventory of available information and setting up a process to review and respond to Letter 226J. In certain cases, an employer may wish to involve legal counsel in this process.
Failure to Respond
Many ALEs may be surprised to receive Letter 226J because they were never notified by any state or federal Marketplace that one or more of their employees qualified for a premium tax credit. This preliminary notice was a protection the ACA put in place for employers to allow them to challenge an employee’s eligibility for a premium tax credit on the front end and to possibly avoid an incorrect ESRP assessment. However, in most cases, this notification was not sent to employers.
Regardless, if an employer does not timely reply to the IRS by submitting the ESRP Response (and any other supporting documentation), a Notice and Demand will be sent for the ESRP that was proposed and assessed. The payment will be subject to IRS lien and levy enforcement actions, and interest will accrue until payment in full is made. It is important that any IRS notification be handled in a prompt fashion.