November 7, 2024
The 2023 reporting season was the ninth time employers who have been applicable large employers (ALEs) since the Affordable Care Act’s (ACA’s) inception filed the Forms 1094-C and 1095-C. While one would expect employers would have mastered how to accurately report the necessary information to the IRS, the truth is almost all employers with a workforce with non-static hours (meaning a workforce which does not consistently work 40 hours a week) are still struggling to report accurately and, in many instances, in a timely fashion. To complicate matters further, the IRS is struggling to accurately assess the employer shared responsibility payments (ESRP) that are part of the ACA’s jigsaw puzzle for funding the premium tax credits individuals can receive from State exchanges if certain parameters are satisfied. These issues are creating a minefield, leading to legal issues for many employers.
Earlier this year, the IRS sent out its latest wave of ESRP notices, in the Form of Letters 226J, to employers it has concluded owe a penalty under IRC section 4980H for the 2021 calendar year. Frequently, and this adjective is probably giving the IRS too much credit, the IRS has lacked the authority to penalize the employers receiving the Letters 226J. The remainder of this series will attempt to untangle the mess that is ACA reporting, discuss bizarre cases I have encountered in private practice, and finally conclude with discussing strategies employers can implement to avoid these IRS penalties moving forward and how the IRS can issue ESRP penalties in a fairer, more efficient manner while following the clear language of the law. In part 1 of this series, we are going to discuss issues employers of all sizes continue to have with accurate, timely reporting.
Before delving into the IRS problems, it is first important to understand why ACA reporting is still a challenge for many employers. The primary driver of the confusion, particularly for larger companies who many would presume are competent and sophisticated enough to grasp the law, is the number of systems that have to interact to create accurate Forms 1094-C and 1095-C. For instance, many employers, including employers who employ more than 10,000 employees, need to pull information from three systems which are often operated by separate companies. At the base layer is the system an employer uses to collect its raw data. How many hours is each employee working? If this layer of the data is not accurate, anything occurring after that point in the process will also not be accurate. However, this point of the process generally is not the problematic part for ACA reporting and ESRP penalties. Raw data collection is the foundational building block for almost all payroll functions, and it was important long before the ACA existed. Companies have mastered this space and it is not the source of the problem for employers. However, it is the genesis layer of the data and critical for accurate reporting.
The next layer that needs to be completed is processing the data properly for the ACA rules, which are unique compared to other federal laws. The ACA created a novel definition of a full-time employee. Under the ACA definition, any employee who averages 30 or more hours of service per week is classified as full-time compared to the previously understood standard full-time employee definition of 40 hours per week. We previously released a three-part series exploring the nuanced employee classification rules created by the ACA. There are certainly a lot of employers who are misclassifying employees under the ACA rules as either part-time or variable hour when the employee is in fact full-time. Similarly, but not as worrisome from a penalty perspective, many employers are classifying certain employees as full-time when the employees are either part-time or variable hour. In fact, many systems don’t even measure the hours of employees who are classified as full-time in the system measuring hours for ACA purposes. Employers who have a workforce with fluctuating hours need to make sure worker classification is being completed using the rules discussed in the regulations.
To refresh everyone’s’ recollection, the final regulations state an employer should consider the following factors to determine how to classify a newly hired employee:
- whether the employee is replacing an employee who was (or was not) a full-time employee,
- the extent to which hours of service of ongoing employees in the same or comparable positions have varied above and below an average of 30 hours of service per week during recent measurement periods, and
- whether the job was advertised, or otherwise communicated to the new hire or otherwise documented (for example, through a contract or job description), as requiring hours of service that would average 30 (or more) hours of service per week or less than 30 hours of service per week.
In all cases, no single factor is determinative but having internal documentation of how the worker classification function is being performed within an organization with a workforce with fluctuating hours is imperative and should include, at a minimum, the three factors mentioned above. While we have not heard of any employers getting in trouble for worker classification issues, this could be problematic if the IRS hones in on this issue. All organizations should be prepared and have documentation to demonstrate they are acting in good faith and within the confines of the rules and regulations with regard to worker classification.
Once an employer identifies the full-time employees the employer has the choice to offer the full-time employee and his/her dependents minimum value coverage at an affordable rate or risk being exposed to a potential ESRP penalty. To be able to accurately report the Forms 1094-C and 1095-C an employer will need to know who is a full-time employee for one or more months in the calendar year, who coverage was offered to (employee, spouse, and or dependent), the lowest cost self-only coverage, whether coverage was accepted or rejected, and if coverage was rejected what affordability safe harbor the employer can claim, if any, for the employee in question. Unfortunately, and complicating the accuracy of ACA reporting, the task of offering health insurance is almost always completed by a separate company from the one keeping track of an employer’s workforce’s hours of service. As a result, for accurate reporting the service provider who is tracking who is a full-time employee must accurately coordinate that information to the service provider who is providing the offer of coverage.
Unfortunately, many employers and service providers are struggling to coordinate the necessary information, which is leading to inaccurate reporting or, in far too many cases, the Forms 1094-C and 1095-C not being reported to the IRS despite have a contractual obligation to do so to the respective client. To avoid the later worst case scenario, all employers should be asking their service provider for a receipt ID. I have assisted more than a dozen employers who thought a “reputable” multi-billion dollar service provider was filing on their behalf only to learn that the service provider never in fact filed the Forms 1094-C and 1095-C when the employers received a letter from the IRS inquiring why the employers had not filed the Forms 1094-C and 1095-C with the IRS. This can create a huge mess that is difficult to resolve, and in certain cases, the IRS is adamant about the employer paying penalties in excess of $100,000, but that’s a story for another day. Without the service provider passing along the receipt ID, all employers should be skeptical the service provider actually provided the IRS the Forms 1094-C and 1095-C.
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 and service providers share some of the blame with the chaos that still exists around ACA reporting. Unfortunately, the data necessary to accurately report the Forms 1094-C and 1095-C is almost always gathered by multiple service providers. All employers must verify that the service provider did in fact report the Forms 1094-C and 1095-C to the service provider by requesting the service provider send the receipt ID upon the Forms being submitted to the IRS. Furthermore, an employer should gather and store the offers of coverage for its employees in case it receives an ESRP penalty for the year in question. Should you have any questions on on how Accord Systems can assist you with your ACA reporting needs, please don’t hesitate to contact us.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC. 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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