The Internal Revenue Service (IRS) recently began enforcing the mandate by notifying employers deemed to owe employer shared responsibility payments (ESRPs) for failing the minimum value or affordability tests for coverage offered in 2015. These proposed “pay or play” penalties may have been assessed erroneously in many instances, but employers have only a narrow time window to contest them, so advance preparation is essential.
The IRS’ ESRP procedures are described in Letter 226J, which the service is issuing to applicable large employers (ALEs) when it determines that, for at least 1 month in the year, one or more of the ALE’s full-time employees (FTEs) was enrolled in an ACA exchange health plan for which a premium tax credit was allowed (and the ALE did not qualify for an affordability safe harbor or other relief for the employee).
If your company receives one of these letters, simply getting it into the right hands may be the first challenge. “Most of our clients consist of a parent company with a benefits/HR department, and numerous subsidiaries that rely on the parent for this type of function,” according to a blog post from Alston & Bird Attorneys Ashley Gillihan and David Godofsky. “The IRS notices will typically be mailed to the subsidiaries, naming only the company as addressee, and not necessarily addressed to any specific individual or even to a department.”
Because ALEs will have only 30 days to respond to a Letter 226J, employers should make sure their mail rooms, and those of their subsidiaries, are looking out for a letter from “The Department of the Treasury, Internal Revenue Service.” It may be addressed to the contact the employer provided on its Form 1094-C, “but the history surrounding the employer mandate suggests there are no guarantees of that,” observed Gillihan and Godofsky.
The Letter 226J might be sent to a company’s tax department, so personnel there should be given a heads-up to forward it to the benefits department, according to Alan Ellenby, executive director of tax services at Ernst & Young LLP. Given the very short time frame, employers should consider requesting an extension, which the IRS is likely to grant since this is everybody’s first time through the process, he said.
Many Assessments May Be Unwarranted
Once the Letter 226J is located, the next step is reviewing the proposed assessment, which in many cases is proving to be unwarranted. “Because of data quality issues, many employers will be assessed amounts they do not owe,” according to the Alston post. “There are any number of reasons that an employee may have received a subsidy and triggered an employer penalty notice, even when all of the requirements for a penalty have not been met.”
Under Section 4980H(a) of the Internal Revenue Code, if an ALE does not offer coverage and has at least one FTE who obtains an ACA subsidy for coverage through an insurance exchange, the employer will be assessed about $2,000 annually (determined on a monthly basis) for every FTE it employs. Under Section 4980H(b), if an employer offers coverage but it falls short of ACA affordability and minimum value standards, the assessment will be about $3,000 for every FTE who actually qualifies for a subsidy. To avoid this section, an ALE had to offer “minimum essential coverage” to at least 70% of FTEs in 2015 (that threshold is now 95% for 2017).
Because it is based on the total number of employees, the Section 4980H(a) penalty can add up quickly. At one employer, six FTEs without coverage for a total of 22 months resulted in a proposed penalty of $1.7 million, Ellenby said.
IRS Details ESRP Process
The IRS recently updated the frequently asked questions (FAQs) on its website to address the ESRP enforcement process. Letter 226J will include:
- A brief explanation of Section 4980H;
- An ESRP summary table itemizing the proposed payment by month and indicating for each month whether the liability is under Section 4980H(a), Section 4980H(b), or neither;
- An explanation of the ESRP summary table;
- An employer shared responsibility response form, Form 14764;
- An Employee Premium Tax Credit (PTC) List (Form 14765) that lists, by month, the ALE’s assessable FTEs (those who for at least one month in the year were allowed a premium tax credit and for whom the ALE did not qualify for an affordability safe harbor or other relief) and the indicator codes, if any, the ALE reported on lines 14 and 16 of each of these employees’ Form 1095-C;
- A description of the actions the ALE should take if it agrees or disagrees with the proposed ESRP; and
- A description of the actions the IRS will take if the ALE does not respond to Letter 226J in timely fashion.
If the ALE responds to Letter 226J, the IRS will acknowledge the ALE’s response to Letter 226J with an appropriate version of Letter 227 that describes any further actions the ALE may need to take. If, after receiving Letter 227, the ALE disagrees with the proposed or revised ESRP, the ALE may request a pre-assessment conference with the IRS Office of Appeals.
If the ALE does not respond to either Letter 226J or Letter 227, the IRS will assess the amount of the proposed ESRP and issue a notice and demand for payment, Notice CP 220J. ALEs will not be required to include the ESRP on any tax return that they file, or to make payment before receiving the Notice CP 220J.
For purposes of Letter 226J, the IRS’ determination of whether an employer may be liable for an ESRP, and the amount of the potential payment, are based on information reported to the IRS on Forms 1094-C and 1095-C and information about FTEs of the ALE who were allowed the premium tax credit.
The Form 14765 includes a row under each employee entry where the employer may correct the codes, if appropriate. At this stage, employers may decide to involve their third-party administrator or other service provider to provide additional information, Ellenby said. Form 14764 also allows an employer to designate an “authorized representative” to contact the IRS on its behalf, but this must be an attorney, certified public accountant, or IRS-enrolled agent.
Employers should be taking a hard look at their ACA reporting data and their processes for gathering it—for example, obtaining identifiers from an employee’s dependents, said Ron Krupa, Ernst & Young senior manager of ACA services. “The accurate data and defensible processes are going to be important if you ever happen to be audited or receive the notices,” he said. Ellenby and Krupa spoke December 6 in a webinar presented by the International Foundation of Employee Benefit Plans.
| David A. Slaughter, JD, is a Senior Legal Editor for BLR’s Thompson HR products, focusing on benefits compliance. Before coming to BLR, he served as editor of Thompson Information Services’ (TIS) HIPAA guides, along with other writing and editing duties related to TIS’ HR/benefits offerings. Mr. Slaughter received his law degree from the University of Virginia and his B.A. from Dartmouth College. He is an associate member of the Virginia State Bar.
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