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New IRS Letters Call Into Question Accuracy of ACA Penalties – Shows Need to Follow Clear Language of ACA and Provide Employers Two Separate Appeals Processes

November 1, 2023

In late September a private practice client of mine received a letter from the IRS with good news! The letter stated that my client was being provided a credit because the IRS determined that an individual who had previously triggered a section 4980H(b) penalty was not, in fact, eligible for a premium tax credit (PTC). As a result of the employee not being eligible for a PTC, the employee could not trigger a section 4980H(b) penalty so the IRS provided my client with a credit (note the penalty stemmed from a year prior to me representing this client as we are currently working our way through an IRS appeal for a penalty in a later year). While this is definitely good news for my client, the situation highlights the failure of HHS, the Exchanges, and the IRS to send out section 1411 notices, set up a separate 1411 appeals process, and follow the clear text of the ACA. The rest of this article will explore how a proper section 1411 notice could have allowed my client to avoid this situation.

Rehashing the IRS ignoring the clear procedures that needed to be followed with the section 1411 notice is unnecessary in this article as we thoroughly covered that topic in a previous publication. We highly encourage readers of this article to review the contents of that publication. In this paper we try to balance brevity with the necessary ACA provisions that led to the fiasco employers who receive these letters face.

The best place to start is a review of the Patient Protection and Affordable Care Act (PPACA; also referred to as the ACA in places in this article). Once a determination has been made that an individual is eligible for an applicable PTC or cost-sharing reduction, PPACA section 1411(e)(1) (also referred to as 42 U.S.C. section 18081(e)(1)) requires the Secretary of HHS to notify the Exchange. Once an Exchange receives such notice, it must notify the employer of the determination and the potential consequences. Disappointingly, and to the detriment to all employers who have received an IRS letter proposing penalties, or even worse, paid penalties under IRC section 4980H, this largely has not occurred. As the statute clearly and unambiguously states:

(iii) Employer Affordability – If the Secretary (of Health and Human Services) notifies an Exchange that an enrollee is eligible for a premium tax credit under section 36B of title 26 or cost-sharing reduction under section 18071 of this title because the enrollee’s (or related individual’s) employer does not provide minimum essential coverage through an employer-sponsored plan or that the employer does provide that coverage but it is not affordable coverage, *the Exchange* shall notify the employer of such fact and that the employer may be liable for the payment assessed under section 4980H of title 26. (*emphasis added*)(see (PPACA section 1411(e)(4)(B)(iii) also formally referenced to as (42 U.S.C. section 18081(e)(4)(B)(iii)).

While it is tough to pinpoint an exact number, almost none of these section 1411 notices ever went out. What may surprise some to read though is that some employers have received the section 1411 notices. In all of the ACA appeals I have been involved with through the years, and there have been many, I have still never seen a proper section 1411 notice sent by the Exchange prior to the IRS sending its sham section 1411 notice along with a proposed penalty. As we covered extensively in our previous publication, these notices were required to be sent by the Exchanges prior to the IRS being able to assess a penalty under IRC section 4980H. These notices were supposed to serve as a useful tool for employers as it alerts them to the possibility of an employee triggering an IRC section 4980H penalty. By bundling the sham 1411 notice up with the IRS proposed penalties, this employer protection was lost and the clear language of the ACA was not followed.

Additionally, as the below provision clearly states, the section 1411 notice was supposed to have its own, separate appeals process.

(2) Employer Liability

(A) In General. The Secretary shall establish a separate appeals process for employers who are notified under subsection (e)(4)(C) that the employer may be liable for a tax imposed by section 4980H of title 26 with respect to an employee because of a determination that the employer does not provide minimum essential coverage through an employer-sponsored plan or that the employer does provide that coverage but it is not affordable coverage with respect to an employee. Such process shall provide an employer the opportunity to—

(i) present information to the Exchange for review of the determination either by the Exchange or the person making the determination, including evidence of the employer-sponsored plan and employer contributions to the plan; and

(ii) have access to the data used to make the determination to the extent allowable by law

Such process shall be in addition to any rights of appeal the employer may have under subtitle F of such Code. (emphasis added)( see ( PPACA section 1411(f)(2) also formally referenced to as (42 U.S.C. section 18081(f)(2)).

The emphasized language above is clear with regards to the separate appeals rights an employer is entitled to when it receives a section 1411 notice. The emphasized flush language in section 1411(f)(2) could not be clearer that the appeal rights an employer is entitled to with regard to a 1411 notice are separate to and distinct from the appeals rights an employer would have under subtitle F of the IRC for a section 4980H penalty. There are a few reasons the section 1411 appeals process was set up to be distinct from any IRS appeal which, again, were covered thoroughly in our previous publication.

However, one of the reasons we discussed, which has unfortunately reared its ugly head in this scenario, is the importance of the timing of the 1411 notice to protect the employer and the individual taking the PTC. The section 1411 notice was supposed to be sent by the Exchange “within a reasonable timeframe” following a determination that the employee was eligible for a PTC (see 45 C.F.R. section 155.310(h)).

The reason for this is not only to protect the employer who could amend its offer for the remainder of the year, but also to protect the employee. If it is determined that the employee was ineligible for a PTC or cost-sharing reduction, a prompt PPACA section 1411 notice and appeals process could allow the employee to avoid the repayment of subsidies that were improperly granted (see IRC section 36B(f)).

The more promptly the notice is provided to the employer, the less severe the monetary damage will be to the employer or the employee. Not only has HHS infringed upon an employer’s due process rights by not providing a section 1411 notice, the Secretary of HHS has also infringed upon the due process rights of the individuals who were not entitled to receive a PTC or cost-sharing reduction and owe the IRS a tax to repay the government for a benefit the individual was not entitled to receive (see IRC section 36B(f)).

While I cannot speak with certainty as I am not privy to the facts of the individual who had his/her PTC rescinded, the employee who was not entitled to the PTC that allowed my client to receive a credit from the IRS should be liable to repay the amount of the subsidy to the government. The ACA makes this clear. Whether that ACA provision is being followed is anyone’s guess. Regardless, if the individual had to repay the IRS, which by law it should have to or have future refunds withheld, the government has failed not only the employer in this situation, but also the individual through its bungled section 1411 notice rollout. Had a section 1411 notice been properly sent in this instance, presumably the Exchange would have been able to conclude that the individual in question was not eligible for a premium tax credit.

A government that cavalierly ignores the clear requirements of the law so it can benefit at the expense of employers and individuals cannot be trusted. If the plain and clear language of the law is not followed by the government, society is bound to crumble and the law becomes all but meaningless. If you have been subject to a section 4980H penalty, please contact me directly. We are putting together an efficient process to handle these disputes and plan to guarantee every employer receives the proper protections granted to it by the clear language of the law.

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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