November 8, 2017
IRS Indicates 2015 Employer Mandate Penalty Letters Are Imminent
On November 2, 2017, the Internal Revenue Service (IRS) updated its Questions and Answers on Employer Shared Responsibility Under the Affordable Care Act (ACA) – also known as the “employer mandate”. In particular, FAQs 55 through 58 provide guidance for employers who may be subject to employer mandate payments. The FAQs indicate the IRS will begin sending penalty letters “in late 2017” to Applicable Large Employers (ALEs) that may owe penalties for calendar year 2015. Around this time last year, the IRS had indicated penalty letters for 2015 would be coming “in early 2017”; however, those letters never materialized. Based on the latest update to its FAQs, it appears the IRS has worked out the kinks in its systems and is prepared to begin sending penalty letters.
BACKGROUND
In general, there are two potential penalties (both non-deductible for tax purposes) that could be imposed on an ALE for failure to satisfy the employer mandate.
- Under the first (4980H(a)), an ALE can be subject to a penalty if it does not offer minimum essential coverage to at least 95% of its full-time (FT) employees and their children (70% during 2015 plus, for non-calendar year plans, any 2016 calendar months within the 2015 plan year). In this case, for each month the 4980H(a) standard is not met and at least one FT employee receives a premium tax credit (PTC) for Marketplace coverage, the applicable pro-rated monthly penalty is assessed for every FT employee, minus the first 80 (minus 30 after 2015).
- Under the second (4908H(b)), ALEs that meet the 4980H(a) standard can still be subject to a penalty if one or more FT employees are not offered minimum essential coverage that meets ACA affordability and minimum value standards and receive a PTC for Marketplace coverage. For each such employee, the applicable pro-rated monthly penalty is assessed for each month the employee receives a PTC. Total 4980H(b) penalties are limited to the amount the 4908H(a) penalties would be, if applied.
For these purposes, a FT employee is generally one that averages 30 or more hours per week and an ALE is generally an employer with 50 or more FT employees (including FT equivalents) in the prior calendar year. However, ALE transitional relief was provided for 2015 to employers with fewer than 100 FT employees (as well as for portions of non-calendar year plan years).
The annualized 4980H(a) and 4980H(b) penalties are indexed each year for inflation, as shown in the following table:
| 4980H(a) Annualized Penalty | 4980H(b) Annualized Penalty | |
| 2014* | $2,000 | $3,000 |
| 2015 | $2,080 | $3,120 |
| 2016 | $2,160 | $3,240 |
| 2017 | $2,260 | $3,390 |
| 2018 | $2,320 | $3,480 |
*No employer mandate penalties will be assessed for 2014.
To aid the IRS in administering compliance with the employer mandate, the ACA imposes certain annual information reporting requirements on ALEs. ALEs must submit to the IRS an individual statement (Form 1095-C) for each employee who was FT for one or more months of the calendar year (and must also provide a copy to the individual). Among other things, this form indicates whether the employee was offered coverage meeting ACA minimum value standards for any months of the year, the required employee contribution (if applicable), and whether the ALE is eligible for a safe harbor or other relief for any months of the year. Along with the individual forms, ALEs are also required to submit to the IRS a transmittal cover form (Form 1094-C) with summary data about its employees and offers of coverage.
IRS PENALTY ASSESSMENT PROCESS
Step One: Notification From IRS
The FAQs indicate the IRS will use “Letter 226J” to notify ALEs of proposed penalties. If the IRS determines that one or more of an ALE’s FT employees received a PTC in 2015, the IRS’ determination of whether the ALE may be liable for a penalty is based on the information reported to the IRS on Forms 1094-C and 1095-C for 2015. In instances where reporting indicates that, for months in which FT employees received PTCs, the employees weren’t offered affordable minimum value coverage and no employer safe harbor or other relief was reported, the IRS will issue Letter 226J. According to the Q&A, among other things, the letter will include:
- A summary table outlining proposed penalties, by month, and whether liability is under 4980H(a), 4980H(b), or neither;
- IRS Form 14765*, which is a list, by month, of FT employees who received PTCs and for whom the ALE did not report a safe harbor or other relief on the individuals’ Forms 1095-C;
- IRS Form 14764*, which is an employer shared responsibility response form;
- Description of actions the ALE should take if it agrees or disagrees with the proposed penalties;
- Description of the actions the IRS will take if the ALE does not respond timely to Letter 226J; and
- Contact information for a specific IRS employee the ALE can contact if it has questions.
*The IRS has not yet published Forms 14764 and 14765.
Step Two: ALE Response To IRS
An ALE that receives a Letter 226J has an opportunity to respond to the IRS to contest any proposed penalties before the IRS issues a demand for payment. Letter 226J will provide instructions for how the ALE should respond in writing to either agree with the proposed penalties or disagree with part or all of the proposed penalties. The due date for responding to Letter 226J will be noted in the letter (generally 30 days from the date of the letter). If the ALE does not respond to Letter 226J, the IRS will assess the amount of the proposed penalties and issue demand for payment.
Step 3: IRS Response to ALE
If an ALE responds to a Letter 226J, the IRS will acknowledge the ALE’s response with one of five versions of “Letter 227”, which will describe any further actions the ALE may need to take. If the ALE disagrees with the proposed or revised penalties indicated in Letter 227, the ALE may request a pre-assessment conference with the IRS Office of Appeals by following the instructions provided in the letter and IRS Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don’t Agree. A conference must be requested in writing by the response date noted in Letter 227 (generally 30 days from the date of the letter). If the ALE does not respond to Letter 227, the IRS will assess the amount of the proposed penalties and issue demand for payment.
Step 4: Payment of Penalties
If, after this process, the IRS determines an ALE is liable for employer mandate penalties, the IRS will issue a demand for payment via “Notice CP 220J”. Notice CP 220J will include a summary of the assessed penalties and will reflect payments made, credits applied, and the balance due, if any. The notice will also instruct the ALE how to make payment, if any. ALEs are not required to include the employer mandate penalty payment on any tax return that they file or to make payment before receiving demand for payment via Notice CP 220J. Information regarding payment options such as an installment agreement can be found in IRS Publication 594, The IRS Collection Process.
NEXT STEPS
There were several legislative efforts earlier this year to repeal and replace the ACA, including retroactively eliminating the individual and employer shared responsibility mandates, and it has been reported that Republicans may again try to repeal those mandates as part of their tax reform bill. However, to date, no such repeal bills have passed and the most recent proposed tax reform bill does not include a repeal of the mandates. In the absence of a repeal, employers should be prepared to respond to any IRS penalty letters and continue to prepare for 2017 reporting (due in 2018).
Employers that receive Letter 226J should review it carefully and consider whether there is a basis to pursue an appeal, including whether each applicable employee was FT for ACA purposes in each month for which a penalty is assessed. Employers should be mindful of the response deadline, which will generally be 30 days from the issuance date appearing on the letter, and should consider taking steps now to work with applicable internal resources and outside data vendors to set up a process to ensure they have all information necessary to submit a timely appeal of proposed penalty assessments, including payroll records and documentation regarding how offers of coverage are made. Depending on mailing delays and internal routing, an employer may have a very short timeframe before the due date to respond, so advanced planning is critical. Employers that have questions regarding Letter 226J or IRS response letters should consult with qualified benefits counsel so that the relevant facts and circumstances can be reviewed.
Employers should also be reminded that ACA Section 1558 prohibits retaliation against employees who receive PTCs. Among other things, employers are prohibited from discharging or discriminating against an employee because the employee received a premium tax credit. Employers violating Section 1558 may be required to reinstate the employee to his or her former position (and provide back pay) and may be subject to compensatory damages, costs and expenses (including attorneys’ fees) incurred by the employee in connection with the bringing of a complaint.
To-date, the brief IRS FAQs published last week are the only guidance that has been provided regarding the employer mandate penalty assessment process. Undoubtedly, there are many procedural questions yet to be asked and answered. Trion will continue to monitor this matter and update you as developments occur.
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Your Trion Strategic Account Managers are here to answer any questions you might have as you prepare to comply with ACA requirements. If you are not currently a Trion client and would like assistance navigating the changes required by health care reform, please contact us today by emailing MBGray@Trion.com 610-207-8985