The IRS Is Ready to Collect on ACA Employer Penalties The IRS Is Ready to Collect on ACA Employer Penalties

The IRS Is Ready to Collect on ACA Employer Penalties

The Internal Revenue Service (IRS) recently released a template letter it will use to notify large employers of their potential liability for an employer shared responsibility payment (ESRP). These payments may be assessed under the Affordable Care Act (ACA) when a large employer fails to offer its full-time employees affordable health care coverage that provides minimum value.

The IRS is issuing the proposed assessment letter (Letter 226-J) for ESRPs related to the 2015 calendar year, the first year of applicability. Employers who receive Letter 226-J will have 30 days to either respond with payment of the assessed amount or with an explanation as to why the proposed assessment is incorrect. A failure to respond will trigger a notice and demand for payment. These IRS enforcement efforts serve as a reminder that the ACA employer shared responsibility rules remain applicable despite congressional efforts this year to repeal the law.  Employers who believe they may receive Letter 226-J should be prepared to make a timely response.

Which Employers Could Receive a Letter?

An employer should expect to receive Letter 226-J from the IRS this year if:

  • The employer was a large employer in 2015. Generally, for 2015, an employer was a large employer if, taking into account all employers in its controlled group, the employer had 100 or more full-time employees (including full-time equivalents) on business days during 2014. 
AND ONE OF THE FOLLOWING IS TRUE:

  • The employer was subject to the A Penalty for one or more months of 2015. For 2015, the A Penalty applied if the employer did not offer health care coverage to at least 70% of its full-time employees (and their dependents) and at least one full-time employee purchased coverage on the Health Insurance Marketplace and qualified for a premium tax credit for one or more months.
OR

  • The employer was subject to the B Penalty for one or more months of 2015. For 2015, the B Penalty applied if the employer offered health care coverage to at least 70% of its full-time employees (and their dependents), but at least one full-time employee purchased coverage on the Health Insurance Marketplace and qualified for a premium tax credit for one or more months. The employee could have qualified for a premium tax credit if the coverage was unaffordable or did not provide minimum value or because the full-time employee was not offered coverage.
For years after 2015, ESRPs will apply to an expanded group of large employers (50 or more full-time employees) and require a higher percentage of coverage to avoid the A Penalty (95% instead of 70%). The IRS has not indicated when it will notify large employers of proposed ESRPs for 2016.

How is the Proposed ESRP Calculated?

ESRPs are calculated for each month and depend on whether the employer is subject to the A Penalty or the B Penalty with respect to that month. The proposed ESRP is the annual total of each month in which either penalty applies:

  • The 2015 A Penalty is $2,080 (annualized) multiplied by the total number of full-time employees, less the first 80 full-time employees. (For years after 2015, the A Penalty only disregards the first 30 full-time employees.)
  • The 2015 B Penalty is $3,120 (annualized) multiplied by the number of full-time employees who received a premium tax credit, capped at the amount that would have applied under the A Penalty.
The A and B Penalties will be increased for inflation in subsequent years. The IRS will enclose with Letter 226-J an ESRP summary table that breaks down the total proposed ESRP by month, as well as a listing of the employees who qualified for premium tax credits and triggered the proposed assessment (Form 14765, Employee Premium Tax Credit Listing).    

Be Prepared to Respond

Large employers in 2015 should be prepared to quickly access paper or electronic copies of their 2015 Form(s) 1095-C and 1094-C. Employers who used vendors to assist with these filings should contact the vendor now to ensure they will have access to copies if and when needed. Upon receiving Letter 226-J, employers will need to review the information provided in the Letter against the 2015 Forms 1094-C and 1095-C they filed. Employers will also want to review all relevant enrollment and payroll records of employees listed as receiving a premium tax credit to confirm the information is accurate. In determining whether the assessment is accurate, employers should consider whether any transition relief or safe harbors apply, including relief for non-calendar year plans, limited non-assessment periods, or multi-employer plans.

Letter 226-J provides detailed instructions on what an employer should do if it agrees or disagrees with the proposed ESRP, including a response form, Form 14764. An employer who agrees with the assessed amount must sign, date, and return Form 14764 with payment. In lieu of payment, an employer who disagrees with all or part of the assessed amount should include a signed statement with a full explanation of the employer’s disagreement, as well as any documentation supporting the statement. If an employer wishes to correct information it provided on its Forms 1094-C or 1095-C, it will not need to file amended forms. Instead, it will make relevant changes on the Form 14765, Employee Premium Tax Credit Listing, which it will receive with Letter 226-J. In all cases, the employer must take action by the response date on the Letter 226-J, which provides only a 30-day timeframe. 

More Information

The IRS has published the following materials on its website related to this topic:

For more information on the ESRP collection process or any other ACA matters, contact Tara Sciscoe, Chris Sears, Shalina Schaefer, or your Ice Miller benefits attorney.  

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances. 
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