The IRS has started to send out letters informing employers of their potential liability for an employer shared responsibility payment for the 2015 calendar year. Starting in 2015, a key component of Affordable Care Act (ACA) compliance for large employers involved offering affordable, minimum-value health insurance to at least 70 percent of their full-time employees or potentially being liable for a penalty. This increased to 95 percent for 2016 and subsequent years. Many employers received exchange notifications when employees enrolled in subsidized coverage in a public exchange , but the reality of the ACA's employer mandate is about to set in. The IRS has sent out their first round of Employer Shared Responsibility Payment notifications.
The Penalty Notification and Assessment Process
On November 2, 2017, the IRS added new details to their long-standing series of FAQs about the ACA's employer mandate, noting that 2015 penalty notifications will be sent to applicable employers "in late 2017."
Employers have a lot to do during the penalty notification and assessment process. Employers will, of course, have an opportunity to respond and appeal before an official assessment is made — but it will be within a tight time frame.
The IRS will send an Applicable Large Employer (ALE) a penalty notification letter if the IRS 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 (PTC) was allowed, and the ALE did not qualify for an affordability safe harbor or other relief for the employee. When an employer receives a penalty notification from the IRS (Letter 226-J), the employer can respond to the IRS to dispute liability for a penalty payment. The IRS will acknowledge the response with Letter 227, which may include a revision of the proposed assessment or further actions an employer can take. If the employer still disagrees with the assessment, the employer can request a conference with the Office of Appeals if made within 30 days.
Gather Your Records
The time constraint of 30 days makes it important to prepare in advance as much as possible. If you've received any exchange notices, you'll want to compile them, along with any appeals you filed in response. Keep in mind that very few exchange notices were mailed by exchanges in 2015. If you received few such notices, or none at all, it does not mean that none of your full-time employees received ACA coverage with a PTC. You'll also want to make sure you have access to your records of employee coverage offers, proof that the health plan offered provided minimum value, the affordability safe harbor you used and your IRS informational reporting (Forms 1094-C and 1095-C) from 2015.
Compare the Penalty Notification with Your Data
Penalty notifications will include a detailed breakdown of the proposed penalty. This will include whether the penalty is because of failure to offer coverage altogether (to at least 70 percent of your full-time employees, as defined by the ACA), or failure to offer affordable health coverage that provided minimum-value. It'll also include a list of full-time employees who received a premium tax credit an exchange, and were not, according to IRS records, offered affordable, minimum value employer-sponsored coverage.
If you work with an ACA compliance vendor and have penalty management as part of your ACA services, you may be able to outsource the process of comparing the IRS penalty notification with your own records. If not, you'll need to compare the IRS notification with your internal data, record any discrepancies and communicate them to the IRS as soon as possible.
Pay the Assessment in a Timely Manner
If an employer doesn't respond to Letter 226-J (or after correspondence with the IRS and possible conference with the appeals office), the IRS will proceed with an official demand for payment (Notice CP 220J). At that point, employers can pay the penalty by the due date or request an installment agreement according to the terms of Publication 594, which outlines the IRS collection process.
Protect Your Organization Going Forward
The current IRS notices are for the 2015 calendar year. There may be errors in the penalty notification that can be remedied via correspondence and a possible appeal. Still, organizations can't go back in time to fix material errors in terms of coverage that wasn't offered to eligible employees or that didn't meet affordability safe harbors.
ACA compliance involves merging data from multiple platforms and systems within your organization. Outsourcing ACA compliance may prove to be the most effective way to help avoid penalties. If you receive a penalty assessment for 2015, you'll want to work with your in-house team or compliance vendor to address any possible vulnerabilities in your tracking, compliance and reporting processes.
To offer your organization the most proactive protection possible, it's smart to consider the following points:
-Are you offering coverage to all employees who work an average of at least 30 hours per week as defined by the ACA?
-Are you aware of ACA compliance rules for seasonal and variable-hour employees, and do you have a process in place for tracking hours for variable-hour employees?
-Are you on track for having your 2017 Forms 1095-C distributed to employees by the end of January 2018, keeping in mind this preparation may overlap with the time frame for addressing a potential penalty notice for calendar year 2015?
-Do you have a system in place to electronically transmit your Forms 1094-C and 1095-C to the IRS, monitor IRS responses and refile any rejected or erroneous forms in a timely manner?
Your organization may have implemented changes since 2015 to improve your ACA compliance systems, but the first round of penalty notifications should serve as a reminder to double check your current processes. This can head off future penalty notices and ensure that if exchange notices or penalty notices do arrive, you'll have all the data necessary to appeal — and hopefully avoid a penalty.
For further guidance on keeping up with ACA compliance, sign up for ADP's ACA Special Edition Webcast.
See also our most recent Eye on Washington 'New IRS Guidance on ACA Employer Shared Responsibility Assessments for 2015.
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