October 10, 2018
The IRS recently released the final instructions to the Forms 1094-C and 1095-C with minimal changes compared to the final instructions from 2017. Most of the changes made compared to previous iterations were so minor they are not even worth mentioning, but somewhat baffling and lacking grammatical support, such as putting Arabic numbers like “4” instead of spelling out “four”. This article provides a brief summary of the most important change, the enforcement of the employer mandate which was not occurring when previous final instructions were released, discusses the few substantive changes and key dates, and provides a brief overview of penalties associated with the Forms. The article concludes by repeating our discussion of a problem that persists related to the code 2F on line 16 of the Form 1095-C.
The IRS has Started to Enforce the Employer Mandate
While there are no huge substantive changes to the Forms 1094-C and 1095-C compared to previous iterations, in a way everything has changed with the Forms as a result of the IRS enforcing the employer mandate. At the tail end of 2017 the IRS began sending employers proposed penalty notices related to the employer mandate. Often times the proposed penalty amounts were hundreds of thousands of dollars with some even proposing penalty amounts of millions of dollars. Fortunately, every Accord Systems client was able to steer clear of the penalties to date due to a two pronged effort. First, the Accord clients offered minimum essential coverage with the appropriate metal tier in a timely, affordable manner to the necessary employees. Additionally, and as I learned through handling many Letter 226J appeals in private practice, Accord’s clients submitted accurate line 14/16 code combinations for the millions of Forms 1095-C it submitted on client’s behalf and that seemed to influence not receiving a Letter 226J from the IRS.
The most important thing to do to avoid an employer mandate penalty is offer a rich enough minimum essential coverage plan at an affordable price to the necessary employees. If an employer fails to take this action, Accord Systems or any other service provider reporting on the employer’s behalf cannot do anything to help the employer avoid the employer mandate penalties. If insufficient coverage or unaffordable coverage is offered, the employer will be relying on its full-time employees not receiving a premium tax credit. However, what all employers can control is that the service provider it selects to provide the Forms 1094-C and 1095-C to the IRS uses tools that ensure the accuracy of the line 14 and 16 code combinations. Accord has used tools since 2015 to ensure that each client is submitting accurate information to the IRS based on the information the client provides Accord. Furthermore, when filing with the Accord software it is impossible to file code combinations that are impossible for a single month and a multi-month period and code combinations over multi-month time periods that are rare are flagged for review. From my private practice I have come to the conclusion that this matters to the IRS.
On multiple Letters 226J I have reviewed in private practice several employers received a proposed penalty for months in which the employer entered codes that should have protected the employer from the employer mandate penalty (such as entering code 1C on line 14 and code 2F on line 16). At first this was confusing as the codes entered should have protected the employer from receiving a Letter 226J for that particular employee. However, as I dug deeper into the data, I discovered codes entered on the employer’s Forms 1095-C that were impossible such as code 1H on line 14 and code 2F on line 16. Code 2F can never be combined with code 1H so it is possible that the corrupt data submitted to the IRS caused the IRS to place more scrutiny on the employers Forms 1095-C. A different client had the 1H/2D code combination transitioning to a 1C/2D code combination before finally getting to a 1C/2F code combination. This is another scenario that is not possible and 1C should never be with 2D. While we do not know this for a fact, in every incorrect proposed penalty I have seen to date, at least some of the months submitted by the employer have included impossible code combinations on line 14 and 16. That, combined with the fact that not a single Accord client has received a Letter 226J for a valid reason or as a result of an IRS error, leads us to believe the accuracy of the codes submitted to the IRS matters when the IRS is proposing penalties through the Letter 226J.
Changes to the Form 1094-C
There are no other substantive changes to the Form 1094-C.
As of now an employer will have to furnish the 2018 Form 1095-C to certain employees by January 31, 2019. The Form 1095-C is by far the more complicated Form and providers who are not automating the process will undoubtedly struggle to meet this deadline.
The deadline to file the Forms 1094-C and 1095-C with the IRS is February 28, 2019 if the employer is filing on paper. If an employer is filing electronically, the deadline is March 31, 2019. However, March 31, 2019 is a Sunday. Therefore, employers filing electronically have until the following Monday, April 1, 2019 to file the Forms 1094-C and 1095-C with the IRS.
An employer who is unable to meet the deadlines discussed above can file an extension. Unfortunately, there is no automatic extension for the tightest deadline of furnishing the Form 1095-C to certain employees by January 31, 2019. However, an employer may request an extension of time to furnish the statement by sending a letter to the IRS with the filer’s name, TIN, address, the type of return for which the extension is being requested, a statement that the extension request is for providing statements to employees, the reason for the delay, and the signature of the filer or authorized agent. This extension request must be postmarked by or before the January 31, 2019 deadline. If the government is lenient, something an employer should not anticipate, the extension will generally only be granted for 30 days. If an employer completes the Form 8809, it will receive an automatic 30 day extension for filing the Forms 1094-C and 1095-C with the IRS.
An employer will no longer be able to use the good faith efforts standard to protect itself from filing information returns or payee statements with inaccurate or incorrect information. This could change, as it did last year, but as of the publication of this article no good faith efforts standard has been communicated by the IRS. In previous years, if the Forms 1094-C and 1095-C were filed on time, the IRS did not assess a penalty for filing an information return or payee statement with inaccurate or incorrect information so long as a good faith effort was made by the employer. An employer can be penalized $270 per return (a $10 increase from last year) for failing to file a correct information return (the Forms 1094-C and 1095-C filed with the IRS). Similarly, an employer can be penalized $270 per statement (a $10 increase from last year) for failing to provide a correct payee statement (the Form 1095-C that must be furnished to certain employees by January 31, 2019). Each penalty is separately capped. This amount has risen to $3,275,500 in 2018 compared to $3,218,500 in 2017. However, these penalties can be increased if there is intentional disregard for the filing requirements. It is easy to envision the worst case scenario of the same Form 1095-C that is furnished to an employee with incorrect information being provided to the IRS at the later deadline with the same incorrect information. In this worst case scenario, that Form 1095-C with incorrect information could trigger a penalty of $540.
Problems with Code 2F
As explained more thoroughly in our previous publication, when discussing line 16 code 2F, the form w-2 affordability safe harbor code, the final instructions state “If an ALE Member uses this safe harbor for an employee, it must be used for all months of the calendar year for which the employee is offered health coverage (emphasis added).” This is a strong statement.
First, the calendar year language means there is no exception made for plans that do not operate on a calendar year. This seems like a clear oversight. Combined with the “offered health coverage” language, there are only a few line 16 codes that can be entered in the same calendar year with code 2F. The only other codes that could be appropriate with code 2F on a Form 1095-C are codes 2A (employee not employed during that month), 2B (employee not a full-time employee), 2D (employee in a section 4980H(b) limited non-assessment period), or leaving line 16 blank. Importantly, code 2C (employee enrolled in health coverage offered) is not an appropriate code on the same Form 1095-C as code 2F according to the final instructions. This is a problem.
The way the instructions are currently written could force an employer to submit a Form 1095-C with an inaccurate narrative for the 12 months on the Form 1095-C. There are many scenarios that commonly occur where an employer should be able to have line 16 completed with 2C and 2F in the same calendar year. Furthermore, and importantly, nothing in the final regulations requires the form w-2 affordability safe harbor to be “used for all months of the calendar year for which the employee is offered health coverage” as the final instructions to the Form 1095-C require. It is our hope the final instructions will one day finally address this issue that is impacting so many Forms 1095-C. However, we are not able to count on this with any certainty.
While not much has changed from previous years with regard to the Forms 1094-C and 1095-C, employers who have not taken reporting seriously in previous years have been hearing from the IRS. Therefore, we now know the IRS takes reporting extremely seriously. To date, the IRS has not released any extensions to furnish statements to the necessary employees or provided a good faith efforts standard. Therefore, timeliness and accuracy is essential when completing the Forms 1094-C and 1095-C to avoid potential penalties. If you have any questions or need assistance completing the Forms, please contact us.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorneys P.C. Ryan received his LL.M. from Georgetown University Law Center and his J.D. from Saint Louis University School of Law. He has distinguished himself as a leader in the Affordable Care Act arena and has written and spoken on a variety of ACA topics as it relates to compliance for companies.
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