October 3, 2023
It is hard to believe, but soon employers will be in the middle of reporting the Forms 1094-C and 1095-C to the IRS for the 2023 reporting season. With the reporting season quickly approaching, we thought it was an appropriate time to provide an update on some items we feel are critical to consider in the coming months.
The IRS Enforcement of ACA Penalties Has Become Much Stricter
In private practice I have assisted many clients with IRS appeals related to various ACA issues since the inception of the enforcement of the penalties. Initially these penalties were easy to resolve with the IRS so long as the employer was making a good faith offer and actually made an offer of coverage that was affordable. However, with each passing year the IRS has been more stringent with its enforcement of the ACA penalties and provided stronger pushback in appeals proceedings. As a result, employers must take the reporting obligations seriously.
One area many employers are falling short is documenting offers of coverage. A signed offer declining coverage is a valuable document to provide in an IRS appeal setting for an ACA penalty. Unfortunately, individuals who are not eligible to receive a premium tax credit due to an employer’s offer of coverage are nonetheless going to an exchange and receiving a premium tax credit. If an employer is falling short of accurately reporting the Forms 1095-C to the IRS, these employees have, in certain instances, been triggering a penalty. There is nothing better to provide the IRS in these situations than a signed, dated document declining affordable coverage that provides minimum value. All employers must review their compliance strategy in light of the IRS stringent enforcement of the ACA penalties.
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. If an employer offers a business with a high number of individuals declining coverage, particular attention is required for the documentation of employees declining coverage. If your ACA service provider has been unable to perform to this standard in the past, it may be time to look for a different service provider. The cheapest ACA Service provider initially are sometimes the most expensive in the long run when IRS penalties and attorney fees are taken into account.
Electronic Reporting Will Soon Be Required
In February 2023 the Department of Treasury released final regulations that make electronic reporting for the Forms 1094-C and 1095-C essentially mandatory for all applicable large employers beginning with the 2023 reporting season. For returns filed in 2023, employers who are required to file 10 or more Forms 1095-C, Forms 1099, Forms W-2, and many other IRS Forms in the aggregate must file electronically. Any employer who is an ALE will almost certainly have 10 Forms 1095-C, so essentially the ACA Forms 1094-C and 1095-C must be filed electronically. Any employer who has previously filed via paper will either need to acquire a transmitter control code (TCC) code from the IRS (we don’t recommend this cumbersome process) or partner with a vendor who has a TCC code. Accord Systems has maintained a TCC code since the filing requirements were put in place and files all of its Forms 1094-C and 1095-C with the IRS electronically.
Affordability Threshold in 2024 is Decreasing to 8.39 Percent!
The affordability threshold will decrease in 2024 compared to the 2023 affordability threshold. The affordability threshold for 2024 is 8.39 percent which is down significantly from the 9.12 percent affordability threshold from 2023. The significant drop in the affordability threshold compared to 2023 places employers who are toeing the line of the affordability threshold in danger of being subject to a potential section 4980H(b) penalty if the price of coverage is not reduced for self-only coverage.
Additionally, the IRS has begun to strictly enforce the section 4980H(b) penalty. The IRS is checking to make sure employers who reported using the Form W-2 affordability safe harbor on line 16 of the Form 1095-C, the 2F code, actually qualified for the safe harbor. This is easy for the IRS to verify as it has access to an employer's Forms W-2. Shockingly, the IRS appears to be penalizing all employers who utilized the Form W-2 affordability safe harbor but actually failed to qualify for the safe harbor. This is against the clear language of the ACA and the accompanying regulations.
As a result of the IRS’s stringent position, employers with a low participation rate should strongly consider utilizing the affordability threshold percentage of 8.39 percent when offering coverage for 2024. The final regulations specifically allow an employer to base an employee’s contribution amount on a “consistent percentage of all Form W2 wages…” (see section 54.4980H-5(e)(2)(ii)(A)). Therefore, an employer could guarantee that it will always meet the Form W-2 affordability safe harbor by utilizing a consistent percentage that is less than or equal to the required contribution percentage (8.39 percent in 2024) for the applicable tax year. If an employee of any employer rejects coverage and signs the offer clearly rejecting the affordable coverage offered, any appeal for that particular employee will be easy.
The 4980H Penalties Continue to Increase
The penalty amounts under section 4980H(a) and (b) continue to increase compared to previous years. The Code explains that the original $2,000 amount associated with the section 4980H(a) penalty and the original $3,000 amount associated with the section 4980H(b) penalty would be adjusted for calendar years beginning after 2014 (see IRC section 4980H(c)(5)). The Code tells us that the original dollar amount of each penalty is multiplied by the premium adjustment percentage (PAP) which is defined in a separate section of the ACA (see PPACA section 1302(c)(4)). Furthermore, the Code instructs that the product of those numbers is rounded down to the next lowest multiple of $10 (if the number is not a multiple of $10). The equation is simple once the PAP is known.
In 2024 the PAP is 1.4899877401. Multiplying the PAP by $2,000 produces the number $2,979.98. After applying the rounding rule discussed above, the section 4980H(a) penalty in 2024 will be $2,970 annually which equates to $247.50 per month. Multiplying the PAP by $3,000 produces the number $4,469.96. In 2024 the section 4980H(b) penalty will be $4,460 annually which equates to $371.67 per month.
Conclusion
There were many nuanced changes made to the ACA that could trip up employers with compliance, particularly the affordability of coverage in 2024. In light of the IRS more stringently enforcing the ACA penalties with each passing year, employers need to make sure their ACA strategy and reporting is comprehensive and thorough. We continue to hear from employers who have had bad experiences with “cost effective” service providers assisting with ACA compliance or the IRS (or in many cases both). Keep in mind quality matters with ACA reporting as bad reporting leads to large penalties and large attorney fees. If you have any questions regarding Affordable Care Act reporting or would like to learn more about our services, 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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