Right about now, many employers find themselves struggling to validate data and compile an end of year report. That's in addition to closing the quarter, and dealing with the never-ending stream of routine tasks. We've compiled a list of updates and strategies to help finance leaders survive the year-end reporting process and prepare for the following year, including best practices to adopt in 2018 to help dramatically reduce stress going forward.
While the future of Affordable Care Act (ACA) remains uncertain, it remains the law of the land. The IRS recently updated its Q&As related to employer shared responsibility provisions specifically pertaining to employer shared responsibility payments (ESRP). Under the employer mandate, applicable large employers (ALEs) must either offer full-time employees and their dependents affordable healthcare, that meets the IRS's definition of minimum value, or potentially make an ESRP to the IRS (at least one full-time employee must receive a premium tax credit (PTC) for purchasing individual coverage via a health insurance exchange).
Based on the information provided on Forms 1094-C, 1095-C, and individual tax filings, the IRS will determine the proposed ESRP, if any, and notify the employer via Letter 226-J. The Letter 226J serves as the employer's official notification that a full-time employee received a PTC and that the IRS believes that the employer may owe a payment. An employer can agree or provide additional information to dispute and must do so by the response date on Letter 226J. Normally, Form 1095-C must be furnished to recipients by Jan. 31, 2018, but at the end of last year, the IRS extended the 2018 due date to March 2, 2018. Forms 1094-C and 1095-C must still be filed with the IRS by Feb. 28, 2018 in paper format, or April 2, 2018 electronically. The IRS also extended the good-faith transition relief from information reporting accuracy penalties for employers that can demonstrate they made a good-faith effort to comply with 2017 reporting requirements.
The following should be top of mind for finance leaders as they close out this year and pave the way for a smoother reporting process in 2018:
-Mismatches with names and Social Security Numbers can be the most common errors. Investigate each error message by reviewing the employee's files to ensure accurate data input. If unable to resolve, contact the employee to confirm the accuracy of the data on file.
-The information included in the fields "CoveredIndividualName," and "BirthDt" within "CoveredIndividualGrp" are required to match the information on file with the IRS for the first time with tax year 2017 filings. Further, accuracy penalties may apply to Forms 1094-C and 1095-C, ranging from $50 per return to $520.
-Throughout the year, check for new full-time employees and verify their level of coverage and test for affordability.
Unemployment Insurance Tax: Federal and State
A new version of Schedule R (Form 940), which allocates aggregate wage, tax, deposit and credit payments reported on Form 940, is in draft format and not yet released. As a reminder, a credit reduction to the Federal Unemployment Tax Act (FUTA) rate occurs when a state uses a federal loan to fund unemployment payments and the loan is not repaid by Nov. 10. If loan balances are zero on Nov. 10, no credit reduction takes place.
Using Form 940 to calculate the credit reduction, typically, employers receive a credit of 5.4 percent, resulting in a net rate of 0.6 percent, as noted by the IRS. In states with no credit reduction, FUTA tax equates to $42 per employee per year. However, if your business fails to pay unemployment insurance to the state by Jan. 31, 2018, or you operate in a state where certain wages may not be subject to state unemployment insurance but are subject to FUTA taxation, then those wages don't receive the 5.4 percent credit.
Here are some guidance to keep in mind while closing out 2017, and developing forecasts for 2018:
-After the fifth consecutive January 1 with an outstanding federal loan, a state's employers pay a higher FUTA tax rate, known as a Benefit Cost Rate (BCR) add-on tax. To avoid the BCR, states must pay off their loan obligations, or request a waiver from the DOL by July 2017.
-The DOL published the final 2017 FUTA credit reductions in November, with taxable employers in California and Virgin Islands receiving a credit reduction in FUTA of 2.1 percent, and the Virgin Islands a BCR add-on of 1.1 percent.
-The IRS recently recognized Professional Employer Organizations (PEOs) for employment tax purposes, meaning that PEOs may pay wages and collect and remit taxes on behalf of an employer. In turn, this allows PEOs to file consolidated Form 940s, using the revised Schedule R. The IRS published a list of Certified PEOs, and announced plans to publish suspended and revoked CPEOs in the future.
Changes to Year-End Federal and State Compliance
In an effort to combat refund fraud, the IRS now requires a business to file their copies of Form W-2 by Jan. 31. In addition, employers don't receive an automatic extension to file W-2s and they must apply to receive it by completing Form 8809. In addition, the IRS expanded its W-2 verification pilot program to include 10 to 12 participants. This program involves the inclusion of a 16-character verification code on W-2 forms provided to employees. The IRS expects the code to appear on 60 million forms for 2017.
Here's a planning tip for 2018 — the estimated social security maximum taxable earnings increases from $127,200 to $128,700. The social security rate for employees and employers remains at 6.2 percent. Medicare tax rates remain the same, with the employer and employee rate at 1.45 percent.
State revenue agencies also face an onslaught of refund fraud attempts. And similar to the IRS, state agencies continue to move reporting and filing dates to allow more time to root out fraud. In 2014, Kentucky, Pennsylvania, Wisconsin, Puerto Rico and the District of Columbia have adopted a W-2 deadline of Jan. 31 (Nebraska set a deadline of Feb. 1). However, in 2018, all but six states have moved the W-2 filling date (Nebraska, Hawaii, Michigan, New Mexico, Oklahoma and West Virginia set Feb. 28 as their deadline, while Nebraska continues to require submission by Feb. 1).
In addition to changes in W-2 reporting requirements, states continue to increase their use of technology to simplify withholding audits. They've also increased their focus on mobile workforce compliance and the implications for filing and employer withholding.
How to Make Year-End Financial Reporting More Efficient
Many employers delay beginning preparing their end of year report until late in the fall. Then they find themselves buried in data validation at the busiest time of the year. In addition, finance departments often lack support since the people who administer benefits own the ACA compliance reporting process, so while they are managing the open enrollment process, they find themselves tasked with annual reporting data as well.
Instead of scheduling critical tasks toward the end of the year, consider adopting a monthly compliance audit to detect problems well in advance of the deadline to file annual reports. By doing so, you'll greatly lessen stress within your department and spend less time resolving a long list of issues in the final months of the year.
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