October 13, 2022
The draft instructions for the Forms 1094-C and 1095-C for the 2022 reporting season were released in early October with only nominal changes compared to 2021. However, and importantly, employers who file incorrect or incomplete Forms 1095-C with the IRS may suffer costly penalties that the IRS did not begin to utilize until the 2021 reporting season. The remainder of this article will explore the changes made in the draft instructions for the Forms 1094-C and 1095-C in 2022.
Automatic Extension Provided to Employers to Furnish Forms 1095-C
The deadline to furnish the Forms 1095-C to the requisite employees is March 2, 2023. Regulations were proposed last year, which automatically provided every employer a 30 day extension from the January 31, 2023 deadline. Employers should be aware of certain State reporting requirements which have continued to have a January 31, 2023 deadline.
Information Reporting Penalties Increase
The information reporting penalties for 2022 increased by $10 from $280 to $290 per incorrect form or statement. Additionally, the maximum penalty under IRC sections 6721 and 6722 increased from $3,426,000 in 2021 to $3,532,500 in 2022. The increase in these penalties is important in light of there being no protection for a good-faith effort.
No Protection for a Good-Faith Effort
Beginning with the 2021 reporting season the good-faith efforts relief, which had applied for the first six years of ACA reporting, no longer applied. Consequently, if an employer submits a Form 1095-C to the IRS or furnishes a Form 1095-C to an employee that is incorrect or incomplete, the employer could be penalized $290 per return. It should be noted that this penalty would apply twice to the same Form 1095-C, once for the Form 1095-C that is furnished to the employee and once for the Form 1095-C that is submitted to the IRS for a total of $580.
The chart below details the cost an employer could incur depending on the percentage of its Forms 1095-C that are filed incorrectly or incompletely. While the chart only discusses the penalty under IRC section 6721, if the IRS were to aggressively penalize an employer, the penalty could be doubled by the IRS by utilizing the penalty under IRC section 6722. The column labeled “# of Forms 1095-C” states the number of Forms 1095-C filed by the employer. The columns labeled with a “x%” state the presumed number of Forms 1095-C that are hypothetically filed incorrectly or incompletely. The dollar figure in the chart states the hypothetical penalty.
| # of Forms 1095-C | 1% | 3% | 5% | 10% | 15% | 20% | 25% |
|---|---|---|---|---|---|---|---|
| 100 | $290 | $870 | $1,450 | $2,900 | $4,350 | $5,800 | $7,250 |
| 500 | $1,450 | $4,350 | $7,250 | $14,500 | $21,750 | $29,000 | $36,250 |
| 1,000 | $2,900 | $8,700 | $14,500 | $29,000 | $43,500 | $58,000 | $72,500 |
| 2,500 | $7,250 | $21,750 | $36,250 | $72,500 | $108,750 | $145,000 | $181,250 |
As the chart above displays, an employer who submits 1,000 Forms 1095-C to the IRS with 10 percent of the Forms 1095-C being incorrect could be subject to a penalty of $29,000 under IRC section 6721. Additionally, that employer could be subject to a separate $29,000 penalty for furnishing incorrect Forms 1095-C to employees under IRC section 6722. Many employers and service providers in the ACA space have submitted Forms 1095-C to the IRS that have a much higher error rate than 10 percent in previous years. Consequently, it is easy to envision staggering penalties under IRC sections 6721 and 6722 if the IRS stringently enforces these penalties. As a result, employers must be confident that the information reported to the IRS on the Forms 1094-C and 1095-C is complete, meticulous and error free in order to avoid IRS penalties.
One issue that has been difficult, if not all together unfair, to employers is the IRS is delayed in issuing penalties. The delay in the IRS enforcement of ACA penalties has exacerbated the issues employers face when the employer has implemented a bad strategy or had poor reporting practices. Currently, the IRS is in the process of penalizing employers for the 2019 reporting season. Therefore, it is uncertain how the IRS will operate in enforcing penalties for the 2021 reporting season. It is important to note that there has been a steady trend of the IRS being more stringent with employers with regard to ACA penalties with each successive year.
Accord Systems prides itself on accurate reporting since we began reporting information to the IRS on behalf of our clients during the first year of ACA reporting. Accord Systems created proprietary software to assure its clients reported accurate codes on line 14 and 16 of the Forms 1095-C. Our proprietary software generates a report for all our clients prior to submitting the Forms 1095-C to the IRS. The report generates and organizes all of the potential code combinations that may give rise to a penalty under IRC section 4980H as well as any code combinations that are not allowed by the instructions of the Forms 1094-C and 1095-C which could lead to a penalty under IRC sections 6721 and 6722. This allows Accord Systems’ clients to be proactive and correct potential errors before filing with the IRS. In 2016 Accord Systems enhanced its proprietary software to examine three month increments to flag impossible or odd coding scenarios. Again, this allows our clients to proactively correct problems prior to filing the Forms 1094-C and 1095-C with the IRS. Accord Systems proprietary software has provided tremendous value to its clients.
Disappointed IRS Did Not Consider Our Comments
We are disappointed the IRS did not consider any of our suggested changes to the instructions which we wrote extensively on in the summer. We think it is egregious the instructions continue to have the following language when discussing the 2F, the Form W-2 affordability safe harbor, “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.” We strongly believe that this sentence should be taken out entirely. However, at the very least, the words “calendar year” should be switched to “plan year”. We plan on resubmitting our comments for these draft instructions in the hopes somebody at the IRS finally listens to our concerns.
Conclusion
We anticipate the final instructions will be released any week with minimal, if any, changes compared to the draft instructions. It is essential that employers make sure that every line 14 and 16 code combination submitted to the IRS is error free. Accord Systems has proprietary software that will automatically audit every single line 14 and 16 code combination. Employers who submit incorrect or incomplete Forms 1095-C to the IRS could receive a $290 penalty per Form. This penalty can accrue to a large amount quickly with sloppy reporting. If you would like to learn more about our services, including our licensing agreement, or you have any questions regarding ACA reporting, 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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