ACA Penalties for Large Employers Being Enforced by IRS
On November 2, 2017, the Internal Revenue Service (IRS) quietly updated its Questions and Answers page pertaining to the employer shared responsibility provisions of the Affordable Care Act (ACA). Significantly, the IRS added a section titled, “Making an Employer Shared Responsibility Payment,” which includes the first-ever official, detailed guidance regarding how penalties under Internal Revenue Code (IRC) section 4980H will be communicated to employers with Letter 226J, as well as how employers may respond and make payments.
Background Per ACA regulations, as provided in IRC sections 4980H(a) and (b), applicable large employers (ALEs) must offer their full-time employees minimum essential health coverage that is affordable and provides minimum value. If an ALE fails to offer appropriate coverage to an eligible employee and one or more eligible employees receives a premium tax credit from the ACA Health Insurance Marketplace, the ALE may be subject to an employer shared responsibility payment.
To date, no penalties have been assessed, yet the ACA and its employer shared responsibility provisions have been in effect since tax year 2015. Further – before the recent guidance was published to the IRS website – no formal assessment, response, and collection process existed. Based on the new information, however, the IRS will begin assessing employer shared responsibility payments before the end of this year.
New Guidance: Assessment Begins with Letter 226J
Question: How does an employer know that it owes an employer shared responsibility payment?
Answer: Letter 226J notifies an employer of potential liability for an employer shared responsibility payment pursuant to section 4980H.
In its updated guidance, the IRS explains that Letter 226J will describe the procedures the IRS will use to propose and assess the employer shared responsibility payment. The guidance adds: “The IRS plans to issue Letter 226J to an ALE if it determines that, for at least one month in the year, one or more of the ALE’s full-time employees was enrolled in a qualified health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee).” Liability for and the amount of any potential payments are based on the information that employers report to the IRS on Forms 1094-C and 1095-C and on which full-time employees received premium tax credits through the Marketplace.
IRS Letter 226J will include: - A brief explanation of IRC section 4980H. - An itemized summary and explanation of the proposed employer shared responsibility payment, indicating for each month if the liability is under section 4980H(a), section 4980H(b), or neither. - Form 14764, “ESRP Response”: an employer shared responsibility response form. - Form 14765, “Employee Premium Tax Credit (PTC) List”: a statement that lists, by month, the ALE’s assessable full-time employees. - A description of the actions the ALE should take if it agrees or disagrees with the proposed employer shared responsibility payment in Letter 226J. - A description of the actions the IRS will take if the ALE does not respond timely to Letter 226J. - The name and contact information of a specific IRS employee that the ALE should contact if the ALE has questions about the letter. - Addressing the question of when it will begin notifying employers of potential shared responsibility payments, the IRS states that it plans to issue Letter 226J for the 2015 tax reporting year “in late 2017.”
We Received the Letter… Now What? After receiving Letter 226J, employers will have an opportunity to respond prior to official assessment of liability and demand for payment. The letter will provide instructions on how an employer should respond to acknowledge the employer shared responsibility payment or dispute liability for the payment. Responses are due back to the IRS by the “response date” noted on the letter, typically 30 days from the date of the letter itself. Depending on how an employer replies to Letter 226J, the IRS will respond with a corresponding version of Letter 227 that will provide further instructions on how to proceed.
At this stage, if an employer still disagrees with the payment, the employer will be able to request a pre-assessment conference with the IRS Office of Appeals to protest. Requests for conferences are due by the response date noted on Letter 227, again 30 days from the date of the letter.
Rick Bailey & Company Can Help Now is not the time for ALEs to risk non-compliance. If your organization needs support in managing ACA reporting for prior, current, or future years, contact the specialized team at Rick Bailey & Company.