Procedure & Adminstration
Beginning in January 2016, "applicable large employers" (ALEs) that are subject to the Patient Protection and Affordable Care Act's (PPACA's) employer shared-responsibility provisions under Sec. 4980H will have new reporting requirements under Sec. 6056. These initial PPACA information returns will cover calendar year 2015, with information included for each month of the calendar year. The returns, to be provided to "full-time employees" as defined under PPACA (Sec. 4980H(c)(4)) with transmittal to the IRS, often are likened to Forms W-2, Wage and Tax Statement, which are provided to employees and filed annually with the Social Security Administration. However, important differences between the two reporting requirements may make it difficult for employers to comply with the new Sec. 6056 requirements. In fact, in many instances the employer of record listed on a Form W-2 will differ from the employer required to file information returns under Sec. 6056.
Sec. 6056, added to the Code by PPACA, requires common law employers to report certain information on full-time employees to assist the IRS in determining whether an employer is subject to the Sec. 4980H excise tax. This excise tax (i.e., the assessable payment) will be assessed on large employers that fail to offer "minimum essential coverage" to their employees or that provide health coverage that is not of "minimum value" or "affordable" as defined by PPACA. Sec. 6056 reporting also will be used by the IRS to determine employee eligibility for Sec. 36B premium tax credits for buying health insurance on an exchange. Sec. 6056 reporting is made on Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, which is furnished to full-time employees, and on Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, which is the transmittal form filed with the IRS.
An ALE is an employer with at least 50 full-time employees, including full-time equivalents. Sec. 4980H(c)(2)(C)(i) combines employers in the same corporate structure—using controlled group principles from Sec. 414—such as parents and subsidiaries, into a single employer for purposes of determining ALE status. However, each member of the corporate structure is treated separately for reporting purposes and for determining the excise tax liability. Thus, parents and subsidiaries are aggregated for purposes of determining whether an entity is an ALE but are disaggregated as ALE members for excise tax liability and reporting purposes. Each ALE member must file an information return with the IRS and furnish a statement to its full-time common law employees, using its own employer identification number (EIN).
In contrast to this PPACA reporting rule, for employment tax purposes, while the common law employer usually remains liable for any payroll reporting failure, the employer is not required to report payroll under its name and EIN. As discussed below, many employers have adopted processes for administering payroll through other parties within the corporate structure or through third-party administrators; this practice often results in a party other than the common law employer reporting the W-2 wages paid to its employees. This disconnect between payroll reporting for employment tax purposes and the required common law employer approach for Sec. 6056 reporting purposes can raise compliance and practical difficulties for many employers.
Common Law Employer
The analysis of whether an employer is considered the common law employer arises most often in the context of determining whether an individual is an employee or an independent contractor. A common law employment relationship generally exists when the person for whom the services are performed has the right to control and direct the individual who performs the services, i.e., as to what should be done and also as to how it should be done. A similar analysis is used to identify which of two potential employers is the common law employer. When both parties have some level of control, the common law employer is the party that has the primary right to direct and control the employee.
In the context of Sec. 6056 reporting, businesses may need to evaluate further the employee or independent contractor status of their service providers, including those paid by third parties. This requires a complex analysis and may result in treating service providers as common law employees, even when those individuals are on third-party payrolls, and may trigger Sec. 6056 reporting requirements.
Regs. Sec. 301.6056-1(c)(2) recognizes that ALE members may use third parties to facilitate filing of returns and furnishing employee statements to comply with Sec. 6056. Likewise, an ALE member that operates an employer-sponsored plan may file returns and furnish statements to plan participants on behalf of other ALE members. However, for Sec. 6056 purposes, in most instances the third party must file returns and furnish statements in the name and EIN of each ALE member for that ALE member's common law employees. The preamble to the regulations states that "such contractual arrangements would not transfer the potential liability of the ALE member for the failure to report and furnish under section 6056 and the regulations, or the ALE member's potential liability under section 4980H," (T.D. 9661, preamble). Accordingly, employers who are used to familiar methods of outsourcing employment tax reporting generally will need to recognize that there are differences under Sec. 6056 for PPACA reporting purposes. As a result, ALE members using common third-party arrangements to facilitate payroll compliance, including those described below, remain responsible for reporting under Sec. 6056.
Third-Party Arrangements for Employment Tax Reporting
Designated agent under Sec. 3504: An employer may designate an agent to act on its behalf and file quarterly employment tax returns, make deposits of employment taxes, and file and furnish Forms W-2 annually.Once approved by the IRS, the agent reports for the employer under the agent's own name and EIN. Employer entities within a consolidated corporation commonly appoint one entity within the organization to act as the agent for all employees within the consolidated group. Agents become jointly liable, along with the common law employer, for employment tax and penalties normally applicable to the employer.
Reporting agents and other payroll service providers: Payroll service providers, including reporting agents, provide payroll services for one or more employers. They use each client's EIN to file separate employment tax returns and, if authorized, also may deposit employment and withholding taxes on the client's behalf. Employers that outsource their payroll function remain legally responsible for any employment taxes and penalties determined to be due.
Professional employer organizations (PEOs): PEOs typically operate under an outsourcing relationship to provide comprehensive employment services such as payroll and benefits administration and HR management. The client employer continues to exercise day-to-day control and direction of its worksite employees. While the service agreements between the PEO and client employer often refer to a "co-employment" relationship, the IRS consistently has taken the position that the client employer is the sole common law employer in these relationships (see CCA 200017041). New Sec. 3511 creates a new entity, the certified professional employer organization (CPEO), effective with respect to wages for services provided on or after Jan. 1, 2016 (Tax Increase Prevention Act of 2014, P.L. 113-295, §206(a)).After meeting certain requirements, a CPEO will be recognized as the employer for employment taxes and payroll obligations, while the client employer remains the common law employer directing and controlling the worksite employees. The enacting legislation specifically provides that the new CPEO rules shall not be construed as creating any inference as to worker classification for other federal tax purposes or for any nontax purposes (P.L. 113-295, §206(h)); thus, a common law employer's use of a CPEO arrangement will not affect the employer's PPACA reporting requirements. For more discussion of CPEOs, see "Recent Legislation Creates Professional Employer Organization Status" on p. 493.
Other common arrangements: Other practices commonly used by employers—including successor employer reporting, common paymaster arrangements, operating under bargaining-unit agreements, and participation in multiemployer benefit plans—increase complexity for employers that are trying to comply with the Sec. 6056 reporting requirements.
For example, many employers within a controlled group contribute to a multiemployer health plan to provide health coverage for eligible participants and their dependents. While the plan may have separate reporting requirements for its plan participants, contributing ALEs are required to report for full-time common law employees for whom they are contributing to a multiemployer plan. Coordinating with the multiemployer plan to obtain needed information for Form 1095-C can be challenging, and many employers have failed to recognize that they must include in their Sec. 6056 reporting full-time employees who are, or will become, eligible for multiemployer plan coverage.
In addition to the excise tax previously mentioned, information return penalties under Secs. 6721 and 6722 may apply to an employer that fails to timely furnish to its employees or file with the IRS timely information returns, fails to include all the required information, or includes incorrect information on the return. The penalties generally are $100 per form for each failure to timely file and furnish. Sec. 6724 provides that the penalties do not apply if the errors were due to reasonable cause.
PPACA reporting presents new challenges for employers. With a deadline of early 2016 for reporting monthly information for 2015, employers must act quickly to adopt new procedures to achieve compliance and cannot assume that existing payroll tax reporting approaches or vendors will suffice.
Annette Smith is a partner with PricewaterhouseCoopers LLP, Washington National Tax Services, in Washington.
For additional information about these items, contact Ms. Smith at 202-414-1048 202-414-1048 or email@example.com.
Unless otherwise noted, contributors are members of or associated with PricewaterhouseCoopers LLP.