The number of instances whereby our clients are receiving notices for alleged non-compliance with the ACA’s Employer Shared Responsibility (ESR or “pay or play”) mandate is on the rise. The most common notice being received is IRS Letter 226-J. This notice “alleges” non-compliance because it merely proposes an ESR Payment (“ESRP”) amount based on how it believes the employer may not have complied with the coverage mandate.
The current crop of notices propose ESRPs based on the 2016 tax year. This long lag can be problematic for employers that bought or sold a notified business, for employers that changed payroll/HRIS systems and for employers that turned over key resources who supported that year’s Form 1094/1095 preparation process.
The amounts of the proposed ESRPs that clients have received to date range from $8,000 to $2.6 million.
Letter 226-J is issued via traditional mail to the person named on Form 1094. Employers can miss the IRS’ response deadline when this person turns over and the notice gets lost in the shuffle. HR and Benefits Departments are advised to be on the lookout for these notices and route them appropriately and with urgency.
The majority of the notices being received were triggered first by an incorrectly filed Form 1094. Specifically, the first red flag gets set when the employer delivers a “NO” answer when asked if it provided Minimum Essential Coverage to 95% or more of its full-time employees. What happens most frequently is this box is left blank on the form, either due to a data error by the filer or because the employer did not know how to complete this section of the form. The IRS defaults a blank response to a “NO” answer, thus setting the first red flag and subjecting the employer to the 4980H(a) “sledgehammer” ESRP.
The triggering flag is commonly set by an employee of the employer obtaining a Premium Assistance Tax Credit (“subsidy”) from the Health Insurance Marketplace for individual coverage secured through the Marketplace. The IRS expects large employers to offer coverage to employees before it assists them in paying for individual coverage, and therefore attempts to hold employers accountable for their mandated responsibilities through this process.
The circumstances that prompted the release of Letter 226-J for the 2016 tax year often are evidenced in the information the same employer reported to the IRS for the 2017 and 2018 tax years.
Very often, employees do not provide accurate information to the Health Insurance Marketplace when they apply for a Premium Assistance Tax Credit. However, a notified employer still bares the responsibility for proving such to the IRS by demonstrating what coverage it did and did not offer (and when) to employees who were awarded subsidies.
Everything about these notices is past tense by way of actions, except for the response process itself. Letter 226-J responses warrant immediate attention and action. Therefore, it is recommended that employers quickly gather information about how it offered benefits to full-time employees and to specific employees during the applicable tax year in order to make a timely, confident response.
Employers should not be lulled into thinking the elimination of the ACA individual mandate (effective January 2019) reduces the potential exposure to this problem. The employer mandate is a separate and distinction provision of the ACA. In fact, we anticipate the IRS will soon begin issuing Letter 226-J with proposed penalties applicable to the 2017 tax year.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.