IRS assesses employer shared-responsibility payments under the Affordable Care Act

By Jill Harris, CPA, Washington, and Michael Westendorf, CPA, Dayton, Ohio

Editor: Mo Bell-Jacobs, J.D.

The employer shared-responsibility provisions of Sec. 4980H under the Patient Protection and Affordable Care Act (PPACA), P.L. 111-148, impose an "assessable payment" on applicable large employers (ALEs) that do not offer their full-time employees PPACA-compliant health coverage. The IRS can impose these payments, commonly known as employer mandate or "pay or play" penalties, for months beginning after Dec. 31, 2014.

In November 2017, the IRS began mailing letters to employers assessing proposed employer shared-responsibility payments for the 2015 calendar year. The IRS plans to issue additional letters, including proposed assessments for 2016, in the coming months. Since the assessments can be significant, ranging from thousands to millions of dollars, employers need to understand how to respond to this IRS correspondence.

Applicable large employers

The employer shared-responsibility provisions apply to ALEs, employers that employed on average in the prior calendar year at least 50 full-time employees (employees working, on average, 30 hours per week or 130 hours per month) and/or full-time-equivalent (FTE) employees. All employees of a controlled group under Sec. 414(b) or (c), or an affiliated service group under Sec. 414(m), are taken into account when determining ALE status. Consequently, some small employers with fewer than 50 full-time employees and/or FTE employees are subject to Sec. 4980H because they are a group member. The employer shared-responsibility provisions apply to all common law employers, so tax-exempt organizations, churches, and government entities can be ALEs, in addition to for-profit organizations.

Employer shared-responsibility payments

An ALE may be liable for an employer shared-responsibility payment if it fails to offer minimum essential coverage, or it offers coverage that is unaffordable or does not provide minimum value, and at least one full-time employee purchases health insurance with premium tax credits through the health insurance marketplace (also known as the exchange or the marketplace).

Minimum essential coverage: To meet the minimum essential coverage requirement, an employer must offer health coverage to at least 95% of its full-time employees and their dependents. If an employer fails to meet the minimum essential coverage requirement, the employer could be assessed an employer shared-responsibility payment under Sec. 4980H(a) equal to the number of its full-time employees for the year (minus up to 30 employees) times $2,000 (adjusted for inflation), if at least one full-time employee receives premium tax credits for marketplace health insurance. This nondeductible payment is imposed by month and is $2,080 ($173.33 per month) for 2015, $2,160 ($180 per month) for 2016, $2,260 ($188.33 per month) for 2017, and $2,320 ($193.33 per month) for 2018. For example, if a company offered a group health plan to only 93% (280 ÷ 300) of its full-time employees in 2016 and one full-time employee purchased health insurance through the marketplace with premium tax credits, the company could owe an employer shared-responsibility payment for 2016 of $583,200 ([300 full-time employees — 30 employees] × $2,160). Several transition rules applied for the 2015 calendar year and for plan years that began in 2015 and ended in 2016.

Even though employers in a controlled group or affiliated service group are aggregated to determine ALE status, the determination of whether an employer is subject to an assessable payment and the amount of the payment is made separately for each member. Therefore, one employer's failure to offer minimum essential coverage does not trigger exposure for the other members in the group. However, this separate determination of liability does not permit each member of the group to use the 30-employee exclusion of Sec. 4980H(c)(2)(D); it must be prorated among the members in the group based on their respective numbers of full-time employees.

Minimum value and affordability: An employer may also be liable for employer shared-responsibility payments if it fails to offer employees a health plan that meets the minimum value and affordability requirements. A health plan meets the minimum value requirement if it covers at least 60% of the total allowed cost of benefits that are expected to be incurred under the plan and provides substantial coverage of inpatient hospitalization services and physician services. For coverage to qualify as affordable, a full-time employee's cost for self-only coverage cannot exceed 9.5% of one of the following safe harbors: (1) the employee's wages in box 1 of Form W-2, Wage and Tax Statement; (2) the employee's rate of pay (see Regs. Sec. 54.4980H-5(e)(2)(iii)); or (3) the applicable federal poverty level. This percentage is adjusted annually and is 9.56% for 2015, 9.66% for 2016, 9.69% for 2017, and 9.56% for 2018.

Failure to meet the minimum value and affordability requirements could subject an employer to a nondeductible annual payment under Sec. 4980H(b) of $3,000 for each full-time employee purchasing marketplace health insurance with premium tax credits. This amount rises to $3,120 ($260 per month) for 2015, $3,240 ($270 per month) for 2016, $3,390 ($282.50 per month) for 2017, and $3,480 ($290 per month) for 2018. For example, if an employer offered a health plan that did not meet the minimum value standard to its 300 full-time employees in 2016 and 12 of those employees purchased coverage on the marketplace with premium tax credits, the employer's shared-responsibility payment for 2016 would be $38,880 (12 full-time employees × $3,240).

Reporting to the IRS

Employers subject to Sec. 4980H are required to file Forms 1095-C, Employer-Provided Health Insurance Offer and Coverage, and 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, each year to report to the IRS whether PPACA-compliant coverage was offered to their full-time employees. This information-reporting requirement under Sec. 6056 is effective for calendar years beginning after 2014 and applies regardless of whether the employer offers a group health plan to employees. A Form 1095-C must be prepared for each full-time employee, even if the employee is not participating in the employer's group health plan. Forms 1095-C for a calendar year generally are required to be distributed to employees by Jan. 31 of the following year, but the IRS provided a one-month extension of this deadline for the 2015, 2016, and 2017 forms. Forms 1095-C must be submitted to the IRS with the Form 1094-C by Feb. 28 (if filed on paper) or March 31 (if filed electronically); however, taxpayers can get an automatic 30-day extension of time to file by completing Form 8809, Application for Extension of Time to File Information Returns.

The IRS uses the information from Forms 1095-C and 1094-C to determine whether an employer is liable for an employer shared-responsibility payment. The IRS obtains information about employees receiving premium tax credits from their individual income tax returns and the marketplace and then assesses the Sec. 4980H(a) or (b) payment based on the employer's representations about its health coverage offered to these employees as reported on Forms 1095-C and 1094-C. Therefore, an employer's failure to accurately report offers of health coverage on Forms 1095-C and 1094-C can trigger an assessment letter from the IRS.

Responding to IRS Letters

Letter 226J is the initial letter issued by the IRS to notify ALEs that they may be liable for an employer shared-responsibility payment. The Letter 226J mailing will include a Form 14764, ESRP Response, and a Form 14765, Employee Premium Tax Credit (PTC) Listing. Letter 226J contains a summary table showing information from the employer's Form 1094-C including whether the employer offered minimum essential coverage and the number of full-time employees each month. The table also indicates the number of full-time employees receiving a premium tax credit triggering an employer shared-responsibility payment under either Sec. 4980H(a) or (b) and the amount of the payment by month. Form 14765 supplements this table and discloses the names of employees receiving a premium tax credit during the year and the indicator codes reported on their Forms 1095-C on lines 14 and 16.

Employers have about 30 days to respond to Letter 226J but may request an extension of time. To respond, employers must complete and return Form 14764 to the IRS and indicate whether they agree or disagree with the proposed assessment amount. If an employer agrees with the proposed assessment, the employer can make the payment by including a check or money order with the Form 14764 or depositing the money electronically through the Electronic Federal Tax Payment System. If the employer disagrees with all or part of the proposed assessment, the employer must include a signed statement with the Form 14764 explaining the disagreement and providing any changes to the information reported on Forms 1094-C and 1095-C. Employers can also make changes to the indicator codes on Form 14765 and send the IRS the revised form, along with any other documentation to support their disagreement with the proposed assessment. Employers have the option to authorize a third party to contact the IRS on their behalf or can engage an attorney, CPA, or enrolled agent to represent them before the IRS.

The IRS will review an employer's response to Letter 226J and determine whether it should adjust the amount of the proposed employer shared-responsibility payment. After concluding its review, the IRS will issue to the employer one of five versions of Letter 227. This letter acknowledges the employer's response and describes further actions the employer may need to perform. If Letter 227 contains a proposed or revised employer shared-responsibility payment and the employer disagrees with the amount, the employer generally has 30 days to respond in writing to request a preassessment conference with the IRS Office of Appeals. If the IRS determines that the employer is liable for a shared-responsibility payment after the conference, it will issue a notice and demand for payment (Notice CP 220J). In addition, if the IRS does not receive a timely response from an employer to Letter 226J or Letter 227, it will issue a notice and demand for payment. Employers are not required to make the payment until they receive Notice CP 220J.

Many employers faced significant challenges in gathering the data needed to prepare complete and accurate Forms 1095-C and 1094-C for 2015 and later years. Therefore, some employers have received and will continue to receive Letter 226J due to incomplete or incorrect information reported on these forms. Employers are advised to review their prior-year Forms 1095-C and 1094-C to identify any errors that they could disclose to the IRS to mitigate any assessed payments and to engage knowledgeable professionals to assist them in responding to IRS correspondence.

EditorNotes

Mo Bell-Jacobs is a manager, Washington National Tax, for RSM US LLP.

For additional information about this item, contact the authors at Jill.Harris@rsmus.com or Michael.Westendorf@rsmus.com.

Unless otherwise noted, contributors are members of or associated with RSM US LLP.

Newsletter Articles

PRACTICE MANAGEMENT

Tax software survey

Our annual survey offers a look at how CPAs judged their tax preparation software in a wide range of types of practices.

NEWS

Congress enacts tax reform

Here are many of the most important provisions in the new law that affect both individual taxpayers and businesses. All changes were effective Jan. 1, 2018, except as noted.