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IRS Releases 2020 Instructions for Forms 1094-C and 1095-C with Most Substantial Changes in Years

October 19, 2020


On October 14, 2020 the IRS finally released its draft instructions for the Forms 1094-C and 1095-C. Confusingly, the IRS appears to have released the final instructions the next day. This is disappointing as commenters will not get to be heard before the final instructions are released. In previous years no substantial change was made between the draft instructions and the final instructions. However, this year there were several new items added to the instructions so comments to the draft instructions may have been informative to the IRS. We have decided to reference the proposed instructions just in case the IRS decides to amend the final instructions after receiving comments on the draft instructions. Regardless, the draft instructions and the final instructions released by the IRS to date are exact duplicates so the content that follows applies to either.

While we knew substantial changes were coming to the instructions as a result of Individual Coverage HRAs (ICHRAs), the IRS also made changes that will impact every employer required to file the Forms. As a result of most employers not offering ICHRAs and for simplicity we have decided to break the articles into two parts. The first part will discuss the changes made in the draft instructions that will impact every employer. The second part will discuss the changes made to employers who offer ICHRAs. The remainder of the article discusses the changes made to the 2020 iteration of the Form 1094-C and 1095-C instructions.

Changes That Apply to All Employers

Plan Start Month

The largest change made to the 2020 instructions is the plan start month box will need to be completed. In previous years the plan start month box was optional so most employers elected not to complete it. The plan start month box is located on the same line as the title to Part II of the Form 1095-C. An employer will need to complete the box with the two-digit number (01 through 12) to indicate the beginning of the plan year for the health plan that was offered to the employee. For example, if an employer’s plan year begins in January for all of its employees, the employer will complete the plan start month box for all of its Forms 1095-C with 01. However, if an employer’s plan year operates on a fiscal year of July through June for all of its employees, the employer will complete the plan start month box for all its Forms 1095-C with 07.

If multiple plan years could apply for an individual, enter the earliest applicable month. For example, if an employee is offered coverage for plans that begin in January and July, the employee’s Form 1095-C plan start month box should be completed with 01. If there is no plan under which coverage is offered to the employee, 00 should be entered in the plan start month. Besides the scenario where coverage is not offered to a full-time employee for the year, it appears the plan start month box should be completed with 00 when utilizing the multiemployer interim rule relief (i.e. line 14 completed with 1H and line 16 completed with 2E). Finally, the instructions are clear the plan start month should be two digits. Therefore, January needs to be formatted as 01 instead of just 1, February needs to be formatted as 02 instead of just 2, etc.

Year-to-Year Fluctuation

The only other changes made in the instructions that impact all employers are references to the numbers that fluctuate year-to-year. The penalty for failure to file a correct information return or provide a correct payee statement was increased to $280 per return/statement from $270 per return/statement in 2019. The cap on the total penalty amounts the IRS can assess under Internal Revenue Code sections 6721 and 6722 were increased to $3,392,000 in 2020 compared to $3,339,000 in 2019. Additionally, the affordability threshold percentage for plan years beginning in 2020 is 9.78 percent compared to 9.86 percent for plan years that began in 2019. These numbers are reflected in the 2020 instructions.

Employee’s Age on January 1 Box in Part II and Line 17

For those readers who do not make it to the second part of the article because ICHRAs do not apply to them, the new employee’s age box in Part II should only be completed if the employee was offered an ICHRA. Additionally, line 17 only needs to be completed by employers who sponsor an ICHRA. We anticipate that very few employers sponsored an ICHRA and, consequently, the "Employee's Age on January 1" box and line 17 will frequently be left blank on the Form 1095-C.

Changes For Employers Who Sponsor ICHRAs

What is an ICHRA?

An ICHRA is an HRA which is integrated with individual health coverage (such as a health plan offered on the State Exchange) or Medicare. Prior to the Trump administration these plans violated key principles of the ACA and were therefore not ACA compliant. However, through executive action and a tome of regulations ICHRAs were deemed valid beginning on January 1, 2020.

Importantly, an ICHRA is considered a self-insured group health plan and an eligible employer sponsored plan. Therefore, an ICHRA meets the low bar of the minimum essential coverage threshold. Additionally, if an ICHRA is affordable, it is treated as providing minimum value. Very few employers selected to use ICHRAs as a tool to avoid paying a penalty under the employer mandate in 2020 for myriad reasons but it was a viable option. As a result, the IRS needed to amend the Form 1095-C for employers who elected to use ICHRAs in 2020.

Employee’s Age

The first difference an employer will notice when completing the Form 1095-C for an individual who was offered an ICHRA is a new box. The new box has the title “Employee’s Age on January 1” and is located in Part II of the Form 1095-C. This box is on the same line as the Part II header and the plan start month box. An employer should fill in the employee’s age as of January 1, 2020. It is important to note that for non-calendar year plans or for employees who become eligible during the middle of a plan year, the employee’s age entered in Part II of the Form 1095-C may not be the age used to determine an employee’s required contribution (i.e. the age used assist in determining the amount to put on line 15).

Affordability for ICHRAs

While it would normally make sense to discuss the affordability inquiry after the line 14 discussion, a basic understanding of how affordability works with ICHRAs is necessary to understand some of the concepts discussed regarding line 14. Thus the topic is covered at the most basic level here. For more information an employer should refer to the proposed regulations titled Application of the Employer Shared Responsibility Provisions and Certain Nondiscrimination Rules to Health Reimbursement Arrangements and Other Account-Based Group Health Plans Integrated with Individual Health Insurance Coverage or Medicare released on September 30, 2019.

For an ICHRA, the employee’s required contribution amount is the excess of the monthly premium for the applicable lowest cost silver plan in the geographic location of either the employee’s primary residence or employee’s primary employment site (see more details below) based on the employees age over the monthly ICHRA amount. The preamble to the proposed regulations make it clear that the lowest cost silver plan data will be made available by HHS for employers in all states that use the Federal HealthCare.gov platform to determine whether the ICHRA offer is affordable for purposes of section 4980H. For States that elected not to utilize the Federal HealthCare.gov platform information regarding the applicable lowest cost silver plans should be available at the State’s Exchange website. Finding the applicable lowest cost silver plan is critical to determining whether the ICHRA is affordable.

New Line 14 Codes as a Result of ICHRAs

Below we list the eight new line 14 codes created as a result of ICHRAs being allowed in 2020. To be clear, all line 14 codes only refer to an offer of coverage and in no way depend on what type of coverage the employee accepts. Additionally, and importantly, the preamble to the final regulations for Information Reporting by Applicable Large Employers on Health Insurance Coverage Offered Under Employer-Sponsored Plans (i.e. the regulations that created the Form 1095-C) state “…an ALE member is treated as offering coverage to an employee’s spouse or dependents even if the employee does not have a spouse or dependent, provided that the employee would have been able to elect such coverage if the employee did have a spouse or dependent.”

Following the logic provided in the preamble to the regulations, it is likely the government intends for an employer to enter codes 1L, 1M, and 1N or 1O, 1P, and 1Q following the same logic an employer enters code 1A for an employee who does not have a spouse or dependents. For example, if an employer offers an ICHRA to all full-time employees and their dependents, the employer would enter code 1M or 1P depending on how affordability was being determined for all its employees so long as the employee is eligible for the ICHRA each day of the calendar month. This is true even if there is an employee with no dependents. The first six new codes can be categorized in groups of three based upon whether the employer is determining the affordability of the ICHRA using the lowest cost silver plan of the employee’s primary residence or, alternatively, the employer is utilizing the employee’s primary site of employment (also known as the location safe harbor in proposed regulation section 54.4980H-5(f)(6)). We have included the verbatim language for each new code below:

. 1L. Individual coverage HRA offered to employee only with affordability determined by using employee’s primary residence location ZIP code.

. 1M. Individual coverage HRA offered to employee and dependent(s) (not spouse) with affordability determined by using employee’s primary residence location ZIP code.

. 1N. Individual coverage HRA offered to employee, spouse, and dependent(s) with affordability determined by using employee’s primary residence location ZIP code.

. 1O. Individual coverage HRA offered to employees only using the employee’s primary employment site ZIP code affordability safe harbor.

. 1P. Individual coverage HRA offered to employee and dependent(s) (not spouse) using the employee’s primary employment site ZIP code affordability safe harbor.

. 1Q. Individual coverage HRA offered to employee, spouse, and dependent(s) using employee’s primary employment site ZIP code affordability safe harbor.

. 1R. Individual coverage HRA that is NOT affordable offered to employee; employee and spouse, or dependent(s); or employee, spouse and dependents.

. 1S. Individual coverage HRA offered to an individual who was not a full-time employee.

The IRS also reserved the codes 1T through 1Z which seemed unnecessary but it has no impact on filing for 2020.

Line 15 Changes as a result of ICHRAs

Line 15 should be completed if code 1B, 1C, 1D, 1E, 1J, 1K, 1L, 1M, 1N, 1O, 1P or 1Q is entered on line 14. If 1A, 1F, 1G, 1H, 1R, or 1S is entered on line 14, line 15 should be left blank. Our conversation above provided an overview on how an employer would calculate the line 15 amount for ICHRAs when the instructions require it. For additional details please refer to the proposed regulations.

Line 16 Options for ICHRAs

If an employer is utilizing one of the new ICHRA codes on line 14, the employer has only four possible line 16 codes. First, the employer could use code 2C if the employee enrolls in the ICHRA. This appears to be supported by the current language in the draft instructions as it relates to code 2C but a specific note on ICHRAs would provide greater clarity. Additionally, the three affordability safe harbor codes can be entered on line 16. Therefore, 2F should be placed on line 16 if the employer is using the form W-2 affordability safe harbor, 2G should be placed on line 16 if the employer is using the federal poverty line safe harbor, and 2H should be placed on line 16 if the employer is using the rate of pay safe harbor. The final alternative would be leaving line 16 blank which would leave the employer exposed to a potential section 4980H penalty. These are the only line 16 options for ICHRAs.

New Line 17

If an employer sponsors an ICHRA and uses code 1L, 1M, 1N, 1O, 1P, or 1Q on line 14, the employer will enter a ZIP code on line 17. If the employer used code 1L, 1M, or 1N, the employer will put the ZIP code of the employee's residence. If the employer used code 1O, 1P, or 1Q, the employer will put the ZIP code of the employee's primary site of employment.

Part III of the Form 1095-C and ICHRAs

An employer who sponsors an ICHRA will be responsible for completing Part III of the Form 1095-C. This is as a result of an ICHRA being considered a self-insured group health plan. The same rules an employer used in the past for completing Part III should be used for ICHRAs.

New Definitions as a result of ICHRAs

The final section of the draft instructions added a new definition and expounded on other definitions as a response to ICHRAs. First, the IRS added a definition of affordability to assist employers in determining whether an ICHRA it offers is affordable. While the definition only mentions the lowest cost silver plan for the employee’s residence, an employer can still utilize the location safe harbor discussed in the proposed regulations which allows an employer to use the employee’s primary site of employment ZIP code to determine an employee’s lowest cost silver plan. This is made clear by the 1O, 1P, and 1Q codes. Hopefully, the IRS will clarify this in the final instructions but it can justifiably be inferred from the proposed regulations and the codes mentioned in the previous sentence.

The IRS also added a large portion to the “Employee Required Contribution” definition as a response to ICHRAs being allowed on January 1, 2020. The new language added to the “Employee Required Contribution” section has already been covered in this paper. Finally, the IRS added a few clarifying notes to the “Minimum Essential Coverage (MEC)” definition and the “Minimum Value” definition as a result of ICHRAs.

Example of ICHRA

It is probably easiest to understand the concepts discussed in this article by looking at an example straight out of the proposed regulations. For 2020, Employer Y offers all full- time employees and their dependents an individual coverage HRA with a calendar- year plan year and makes $6,000 available in the HRA for the 2020 calendar-year plan year to each full-time employee without regard to family size, which means the monthly HRA amount for each full-time employee is $500. All of Employer Y’s employees have a primary site of employment in City A. Employer Y chooses to use the location safe harbor and the look-back month safe harbor. Employer Y also chooses to use the rate of pay safe harbor for its full-time employees. Employee M is 40 years old on January 1, 2020, the first day of the plan year. The monthly premium for the applicable lowest cost silver plan for a 40 year old offered through the Exchange in City A for January 2019 is $600. Employee M’s required HRA contribution for each month of 2020 is $100 (cost of the applicable lowest cost silver plan determined under the location safe harbor and the look-back month safe harbor ($600) minus the monthly HRA amount ($500)). The monthly amount determined under the rate of pay safe harbor for Employee M is $2,000 for each month in 2020.

Employer Y has made an offer of affordable, minimum value coverage to Employee M for purposes of section 4980H(b) for each month of 2020 because Employee M’s required HRA contribution ($100) is less than the amount equal to the required contribution percentage for 2020 multiplied by the monthly amount determined under the rate of pay safe harbor for Employee M (9.78 percent of $2,000 = $196). Employer Y will not be liable for an assessable payment under section 4980H(b) with respect to Employee M for any calendar month in 2020. (Also, Employer Y will not be liable for an assessable payment under section 4980H(a) for any calendar month in 2020 because it offered an individual coverage HRA, an eligible employer- sponsored plan that is minimum essential coverage, to all full-time employees and their dependents for each calendar month in 2020.)

Author’s Note to the Proposed Regulation Example - For the example above the employer would place 1Q in line 14 for the employee. The employer would place $100.00 in line 15. Next, the employer would place 2C in line 16. Finally, the employer will put the ZIP code of the employee's primary site of employment in the new line 17. The employer would be responsible for completing Part III of the Form 1095-C.

Conclusion

For most employers the most significant change in the 2020 draft instructions compared to previous iteration is the plan start month box is now required. To be clear, this means the plan start month box should be completed on each Form 1095-C the employer submits to the IRS. Employers who decided to sponsor an ICHRA have a whole new set of rules to assist them in completing the Form 1095-C. Fortunately, most employers will not even need to concern themselves with all of the new ICHRA rules and reporting should be very similar to previous years. Should you have any additional questions or need assistance filing the Forms 1094-C and 1095-C or would like to discuss licensing our software, 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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