Expect Tighter Enforcement of ACA Employer Shared Responsibility Provisions
- Tax Reform
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6 min. Read
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Last Updated: 01/12/2024
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The Internal Revenue Service has stepped up its enforcement of the Employer Shared Responsibility (ESR) provisions. It discontinued the good-faith transition relief from penalties to Applicable Large Employers (ALEs) for incorrect or incomplete information on Form 1094-C/1095-C beginning for Tax Year 2021.
The IRS indicates that the relief, which was provided for Tax Years 2015 through 2020, was meant to be transitionary and it was no longer appropriate years after the ESR provision first went into effect.
With the provision having been in effect since 2015, the IRS might have gained greater insight into how to examine these reporting requirements more robustly for discrepancies. With the potential for greater enforcement of ACA reporting requirements, employers should ensure the timely and accurate furnishing of statements and filing of returns to avoid risk of costly information reporting penalties.
Employers should also be prepared for what to expect from the IRS if they do not meet the requirements under the ESR provision of the Affordable Care Act. Fines can be financially devastating, so businesses should respond to any notice from the IRS to avoid additional action or penalties.
Background
Applicable large employers (ALEs) have been subject to ESR provisions, which include information reporting and the offering of health care coverage.
Under the ACA, governments, insurers, employers and individuals are given shared responsibility to reform and improve the availability, quality and affordability of health insurance coverage in the United States.
ALEs risk a potential assessment if they do not offer adequate and affordable health care coverage to their full-time employees and their dependents, even if only one of their full-time employees receives a premium tax credit for purchasing insurance through a government marketplace.
Additionally, ALEs must report information about the coverage they offer their full-time employees, as it relates to provisions under section 4980H of the Internal Revenue Code (IRC). This information is filed on Forms 1094-C and 1095-C. If businesses do not furnish or file this information accurately and timely, they might be subject to reporting penalties. In addition, for self-insured ALEs, the forms include reporting on individuals covered under the employer plan.
What happens if an ALE does not file a 1094-C/1095-C on time?
ALEs might be subject to information return penalties under 6721 and 6722 of the IRC. These are the same penalties that other information returns are subject to, such as W-2s, if the returns are not filed accurately and timely.
There is no relief for failure to file or furnish in a timely manner.
It is up to the employer to assess whether they are an ALE that is subject to the provision and the reporting requirements on 1094-C/1095-C.
This is where some businesses have encountered an issue; determining whether they are an ALE. In general, an ALE has an average of at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year. However, new employers determine their status using an anticipated employee count and looking at their current year data as opposed to using the previous year’s actual numbers.
Several additional factors used to determine ALE status are the exclusion of employees who have coverage through the military under TRICARE or the Department of Veterans Affairs from employee count, and the application of aggregation rules. The latter states that if you are a controlled or affiliated service group as defined by the IRC then a business must aggregate its employee count across the group to determine whether the business is an ALE subject to ESR provisions.
If an employer is not an ALE, then they do not need to file forms 1094-C/1095-C.
However, if a business is an ALE and just does not file the 1094-C/1095-C, the IRS – using other data subsets – can determine if it appears an employer is large enough to be an ALE. The IRS also will know that they did not receive the required forms from this employer and begin sending out requests for information returns they deem missing. Eight years after the ESR provision went into effect, the IRS is expected to be less lenient with employers in terms of meeting reporting requirements and requiring employers to substantiate information provided.
Notifications: Respond quickly
The IRS has a series of lettered and numbered forms it uses to inform and instruct employers on what action the employer must take. With ESR information reporting provisions, the initial contact with the employer might begin with Letter 5699, which indicates the IRS believes the employer might be an ALE and details the requirements and obligations for filing.
The employer is required to respond to the letter, indicating either that they were not an ALE and explaining why or that they are an ALE. If they indicate they are an ALE, they must file the 1094-C/1095-C and explain why they are filing late.
The notice does explain that the employer might be assessed a penalty for failure to file and furnish the returns.
Failure to respond to this letter will trigger a subsequent notification from the IRS – Letter 5698 – that reminds the employer they have not responded to the previous notification (5699) and that they need to. Failure to respond to this subsequent inquiry will lead the IRS to issue Letter 5005-A and Form 886-A, which gives the amount for the information reporting penalties.
So far, it seems that absent any information from the employer the IRS is basing the amount of the penalty on the presumption that the W-2 count for the employer is the same as the 1095-C count. It must be noted that while all employees receive a W-2, generally only full-time employees (as defined by 4980H) receive a 1095-C, so the number could be significantly less in some cases.
Even if the ALE files the 1094-C/1095-C late, it still might trigger an employer shared responsibility payment (ESRP) assessment based on the information filed on the 1094-C/1095-C. If the information filed on those forms is accurate, then the ESRP assessment would be the correct amount the employer owes the IRS under the provision. However, if the information returns were not filed accurately – late or not – could require another response to the IRS.
What is impact of filing inaccurate or incomplete returns?
While inaccurate or incomplete 1094-C/1095-C forms might be covered by the good-faith transition relief for information return filing penalties for tax years prior to 2021, any erroneous 4980H assessments could be troublesome for employers who will have to spend time correcting the bad information they filed.
The more IRS letters, the more complex process becomes
Beginning in 2017 for the first year of filing in 2015, two aspects have become clearer: what enforcement looks like and the cadences of notices involved. The IRS has been focused on enforcement of the provisions involving full-time employees (as defined by the regulation) who received a premium tax credit. Employers would have received Letter 226-J from the IRS if they had such employees.
The 226-J notice indicates the initial assessment of 4980H liability, which is based directly on what was filed on 1094-C/1095-C. If there were errors in filing, this information must be corrected by researching years past to determine what should have been filed. Not only must the employer make the corrections, they also need to respond to the formal process outlined in 226-J letter.
The formal process is arduous and time-consuming, and employers must provide letters of explanation and reasonable evidence that any changes are valid. It requires significantly more work than if the forms initially had been filed accurately.
At series 227, employers at appeal process
The 4980H liability or ESRP is assessed when an ALE does not offer adequate affordable coverage to full-time employees and their dependents. So, even after the corrections to what was originally filed are made, an employer might still owe an ESRP.
At this point, an employer who has been determined to be an ALE and still has errors that remain uncorrected faces a more complex path, including appealing the assessment determined based on changes made to 226-J or failure to respond to 226-J.
This stage is the 227 series of letters and the response required if corrections are needed is much more formalized. Basically, the further in the process an employer is in trying to ensure the IRS has accurate information to assess the appropriate ESRP, the more complicated the process becomes.
What happens if an employer owes the IRS?
It starts with the employer and a timely response to any IRS notices. Without a response from the employer, the IRS will presume their initial assessment of ESRP or penalty for late filing of returns is accurate.
If employers owe the IRS, they will begin receiving demand for payment notices for the amount owed. Ignoring these notices will only result in another notice being sent for the amount owed, and continued failure to square up on the financial obligation eventually might culminate with an intent to levy notice from the IRS.
In short, it is always better to respond quickly to any IRS notices.
What are the assessments and penalties?
If employers are hoping the good-faith transition relief will help tamp the financial hit, they should know that this is only good through the 2020 tax filing year – and it might only mitigate assessments for inaccurate returns. There is no good-faith transition relief for failure to file the returns.
Information return penalties
The penalties for untimely or inaccurate filing and/or furnishing of 1094-C/1095-C (amounts adjusted annually) are:
| Year ACA Returns Due to be Filed / Furnished | Not more than 30 days late | 31 days late until August 1 | After August 1 |
| 2025 | $60 per return or statement – $232,500* maximum $664,500^ maximum | $130 per return or statement – $664,500* maximum $1,993,500^ maximum | $330 per return or statement – $1,329,000* maximum $3,987,000^ maximum |
| 2024 | $60 per return or statement – $220,500* maximum $630,500^ maximum | $120 per return or statement – $630,500* maximum $1,891,500^ maximum | $310 per return or statement – $1,261,000* maximum $3,783,000^ maximum |
| 2023 | $50 per return or statement – $206,000* maximum $588,500^ maximum | $110 per return $1,766,000^ maximum | $290 per return $3,532,500^ maximum |
| 2022 | $50 per return or statement – $199,500* $571,000^ maximum | $110 per return $1,713,000^ maximum | $280 per return $3,426,000^ maximum |
| 2021 | $50 per return or statement – $565,000^ maximum | $110 per return $1,696,000^ maximum | $280 per return $3,392,000^ maximum |
*Average annual gross receipts for the most recent 3 taxable years and Government Entities (Other than Federal entities)
IRC 6721 and IRC 6722 for businesses with gross receipts less than $5,000,000.
^Average annual gross receipts for the most recent 3 taxable years and Government Entities (Other than Federal entities)
IRC 6721 and IRC 6722 for businesses with gross receipts greater than $5,000,000.
Keep in mind, there is a penalty on furnishing and filing. So, the $330 penalty is doubled to $660 per return if they were not filed or furnished. This can add up quickly as a 1095-C is necessary for every full-time employee.
For more information on penalties, visit the IRS website.
ESRP
There are two potential assessments if adequate and affordable coverage is not offered to all full-time employees and dependents.
4980H(a) assessment
ALE’s who do not offer insurance with minimum essential coverage to at least 95 percent of all, or all but 5, full-time employees and their dependents. There was transition relief reducing this threshold to 70 percent in 2015 and for some non-calendar year plans part of 2016. If any full-time employee receives a premium tax credit, the assessment is an annualized amount of $2,000 (as adjusted for inflation every year) per full-time employee above the first 30 full-time employees. The amount assessed is evaluated on a month to month basis.
4980H(b) assessment
ALE’s who offer insurance with minimum essential coverage to at least 95 percent of all, or all but 5, full-time employees and their dependents (In 2015 and potentially for some months in 2016 using a 70 percent threshold). If a full-time employee not offered adequate or affordable coverage receives premium tax credit, the assessment is an annualized amount of $3,000 (as adjusted for inflation every year) for each full-time employee not offered adequate or affordable coverage who received a premium tax credit. This amount is capped at the amount that would have been assessed under 4980H(a).
Takeaways for employers
It is clear the IRS is still actively enforcing the provision for timely filings and 4980H liability (ESRPs). Navigating this complex provision can be daunting but doing it accurately the first time could save you a hassle in long-run. It is important for employers to understand how the ESR provision works to ensure accurate assessment of your business’ insurance offerings, as well as the potential risk of an assessment to make an informed decision.
Employers should also ensure they are filing accurately the first time to avoid the trouble of having to seek out that information years later. Researching, correcting, and responding to the IRS later can be a much more complex and time-consuming process.
Resources
Q&A on ESR Provisions from IRS
Example of Letter 226-J
https://www.irs.gov/individuals/understanding-your-letter-226-j
Example of Letter 227
https://www.irs.gov/individuals/understanding-your-letter-227
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