By now, Affordable Care Act (ACA) compliance is becoming a routine part of your organization's business strategy. And while most large employers do offer health benefits to their employees, many finance leaders have discovered that being willing to offer coverage is only the first step in complying with the law. Reporting all the details to the IRS is a large part of the compliance challenge, and avoiding IRS audit red flags is always a priority.
In order to avoid ACA penalties, you have to offer coverage to your full-time employees and report the details to the IRS in an accurate, timely manner. But the wide range of employment scenarios at organizations makes employee eligibility determination more complicated than it sounds.
While figuring out which employees are considered full-time, you'll want to be aware of these five potential IRS audit red flags.
1. Incorrect Full-Time Equivalent Calculations
The full-time equivalent provision was included in the ACA to ensure that organizations couldn't just reduce hours for the majority of their workers in order to avoid being applicable large employers (ALE) required to offer coverage. You don't have to offer coverage to your part-time workforce, but they are counted to determine whether your organization is an ALE.
If it is, you still have to offer coverage to your full-time workforce, even if the majority of your employees are part-time. If you have a large workforce, but don't offer coverage because less than 50 of your employees are full-time, you could be putting up red flags — it might appear you simply skipped the full-time equivalent calculation altogether.
2. Misclassified Independent Contractors
The Department of Labor (DOL) has been addressing independent contractor misclassification since before the ACA. They clarified in 2015 that most workers are employees, not independent contractors. Using a large number of independent contractors (particularly if they were previously W-2 employees at your organization) is among the most common IRS audit red flags.
It could be that your contractor arrangements are perfectly legitimate, but you'll want to make sure. If they're not, and an IRS audit determines the workers should be reclassified as W-2 employees, you could be on the hook for the ACA's employer shared responsibility penalty if any of your workers got subsidized coverage through the exchange.
3. Misclassified Full-Time Employees
Misclassifying full-time employees as seasonal employees or variable hour employees is another audit red flag. According to the IRS, you can use an initial measurement period to determine whether a seasonal or variable hour employee is eligible for coverage, even if the employee is working at least 130 hours per month. But if you're incorrectly classifying employees as seasonal or variable hour in order to use the measurement period and avoid offering coverage, you're running the risk of an IRS audit and penalty.
4. Employee Complaints
If your employees feel they meet the definition of full-time and you're not offering them coverage, there are various channels they can use to file a complaint, including state insurance commissioners, the IRS, the DOL and the Department of Health and Human Services. Those complaints could trigger an audit. This is where accurate, thorough communication with your employees will be beneficial for everyone involved.
5. Marketplace Notices
In addition to employee complaints, the IRS is also working with the exchanges to ensure employer compliance with the ACA. You may receive notices from the exchange if you have employees who shop in the exchange and receive premium subsidies. If your organization is subject to multiple marketplace notices, those could potentially be audit red flags, since the employees receiving exchange subsidies have stated you didn't offer them coverage.
Taking steps to avoid IRS audit red flags will put you on the path to a successful long-term strategy for complying with the ACA and ensuring your employees have access to the coverage they need and deserve.
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