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IRS Needs to Amend Form 1095-C Instructions to Allow Employers to Tell an Accurate Narrative with Respect to Form W-2 Affordability Safe Harbor

May 25, 2022


Part I - Part II - Part III


Each year when the draft instructions for the Forms 1094-C and 1095-C are released I always have an ambitious goal to submit comments regarding changes that should be made to the instructions. However, the timing is always poor as it is an extremely busy time of year and I never get around to actually submitting the comments. To be proactive we have decided to write a series on changes we would like to see made to the Forms 1094-C and 1095-C based on the purpose of the Forms and the final rules and regulations.

After the 2021 instructions were released Accord Systems performed an audit on our software to make sure the automation process was working properly in light of the updated language in the final instructions to the Forms 1094-C and 1095-C. Particular attention was paid to lines 14, 15, and 16 of the Form 1095-C. These three lines are one of the main tools the government uses to assess the section 4980H penalties against an employer. Lines 14, 15, and 16 tell the government a 12-chapter narrative about the employee entered on the Form 1095-C.

These lines have 378 potential code combinations between lines 14, 15, and 16 when you include leaving the lines blank even though that is never appropriate for line 14 and is problematic for line 16. However, only a few of the code combinations are theoretically possible given all of the rules discussed in the instructions. If an inaccurate code combination is entered, the employer will be telling the government an inaccurate story related to the employee entered on the Form 1095-C. And, even worse, if an impossible code combination is entered, the government will have no way to process the Form 1095-C. For this reason, it is critical that each Form 1095-C is completed accurately.

During our audit we discovered something interesting that has not changed since the 2015 instructions. When discussing line 16 code 2F, the form w-2 affordability safe harbor code, the instructions state “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 (emphasis added).” This is a strong, unnecessary, and overreaching statement.

First, the calendar year language means there is no exception made for plans that do not operate on a calendar year. This seems like a clear oversight. Combined with the “offered health coverage” language there are only a few line 16 codes that can be entered in the same calendar year with code 2F. The only other codes that could be appropriate with code 2F on a Form 1095-C are codes 2A (employee not employed during that month), 2B (employee not a full-time employee), 2D (employee in a section 4980H(b) limited non-assessment period), or leaving line 16 blank. Importantly, code 2C (employee enrolled in health coverage offered) is not an appropriate code on the same Form 1095-C as code 2F according to the instructions. This is a problem.

The Form 1095-C is used as the primary tool to determine if an employer owes a section 4980H penalty with respect to the individual reported on the Form 1095-C. Similar to any tool used in any craft, accuracy and precision is of the utmost importance. Unfortunately, the language in the instructions is not allowing employers to tell an accurate 12-chapter narrative to the IRS with respect to some employees. The problem is exacerbated by the fact the State exchanges are failing to accurately determine who is eligible for a premium tax credit and are also not sending out the required 1411 notices to employers. Collectively this is leading to a waste of IRS and employer resources through appealing the proposed IRS penalties. For these reasons the IRS should eliminate the restrictive language in the 2022 instructions.

Consider the following simple example. ABC Inc. is an applicable large employer that sponsors a minimum essential coverage plan that provides minimum value. Employee only coverage is offered at a price of $150.00 per month. The plan operates on a calendar year. Riley, a full-time employee, along with his spouse and dependents enroll in the plan offered by ABC Inc. for the 2022 plan year. However, Riley and his family abruptly end coverage on February 28, 2022. ABC Inc. has elected to use the form w-2 affordability safe harbor as the federal poverty line affordability safe harbor and the rate of pay affordability safe harbor will not work for a significant percentage of the company’s employees.

When coding lines 14, 15, and 16 of the Form 1095-C the months of January and February would be straight forward. Riley is enrolled in coverage and his spouse and dependents were also offered coverage. Therefore, code 1E would be appropriate for line 14. Line 15 would be completed with $150.00 and line 16 would be completed with code 2C. How the remaining 10 months should be coded is a little more troubling. Lines 14 and 15 would continue to be coded with code 1E and $150.00. However, line 16 could not be completed with the 2F code under a strict interpretation of the instructions because code 2C was entered on line 16 for one or more months.

Code 2A would not be appropriate because Riley was still an employee for ABC Inc. from March through December. Code 2B would not be appropriate because Riley is a full-time employee. Code 2C would not be appropriate because coverage was not accepted the months of March through December. Riley also would not be in a limited non-assessment period for the months. Therefore, code 2D would also not be appropriate. Code 2E is only appropriate for a multiemployer plan which is not applicable in this example. Finally, the example states the other two affordability safe harbor codes, 2G (federal poverty line affordability safe harbor) and 2H (rate of pay affordability safe harbor) were not adopted by the employer. Consequently, and unfortunately, using a strict reading of the instructions, ABC Inc. would be forced to leave line 16 blank.

In this example Riley should not be able to go to the exchange and receive a premium tax credit as ABC’s offer of coverage should make Riley ineligible for a premium tax credit and he should not be eligible to enroll mid-year. However, as discussed briefly above, Exchanges are failing to accurately determine who is eligible to receive a premium tax credit and to provide employers with the required 1411 notices for all employees who are receiving a premium tax credit from the Exchange. The unnecessary restrictive language in the instructions is preventing employers from controlling the narrative regarding its employees. The situation has led employers to lose faith in the system and waste valuable resources in appealing unnecessary and incorrect IRS proposed penalties. Completely striking the restrictive language in the 2022 instructions would solve the problem.

The situation is more pervasive for non-calendar year plans. To illustrate why this is a problem for all non-calendar year plans consider the following more detailed example. ABC Inc. is an applicable large employer that sponsors a minimum essential coverage plan that provides minimum value. Employee only coverage is offered at a price of $150.00 per month. The plan operates on a non-calendar year and runs from July 1 through June 30. McGee, a full-time employee, along with his spouse and dependents enroll in the plan offered by ABC Inc. for the 2021 plan year which runs July 1, 2021 through June 30, 2022. However, for the 2022 plan year, July 1, 2022 through June 30, 2023, McGee declines coverage. ABC Inc. has elected to use the form w-2 affordability safe harbor as the federal poverty line affordability safe harbor.

When coding lines 14, 15, and 16 of the Form 1095-C the first six months of 2022 reporting would be straight forward. McGee is enrolled in coverage and his spouse and dependents were also offered coverage. Therefore, code 1E would be appropriate for line 14. Line 15 would be completed with $150.00 and line 16 would be completed with code 2C. How July through December should be coded is a little more troubling. Lines 14 and 15 would continue to be coded with code 1E and $150.00. However, line 16 could not be completed with the 2F code under a strict interpretation of the instructions because code 2C was entered on line 16 for one or more months.

Code 2A would not be appropriate because McGee was still an employee for ABC Inc. from July through December. Code 2B would not be appropriate because McGee is a full-time employee. Code 2C would not be appropriate because coverage was not accepted for the second half of the year. McGee also would not be in a limited non-assessment period for the second half of the 2022 calendar year. Therefore, code 2D would also not be appropriate. Code 2E is only appropriate for a multiemployer plan which is not applicable in this example. Finally, the example states the other two affordability safe harbor codes, 2G (federal poverty line affordability safe harbor) and 2H (rate of pay affordability safe harbor) were not adopted by the employer. Consequently, and unfortunately, using a strict reading of the instructions, ABC Inc. would be forced to leave line 16 blank.

By leaving line 16 blank for the months of July through December ABC Inc. will be telling a narrative that McGee was offered coverage but the coverage was declined by McGee and ABC Inc. did not qualify for any of the three affordability safe harbors. This narrative is inaccurate because ABC Inc. could still be eligible to use the form w-2 affordability safe harbor.

To be eligible to use one of the affordability safe harbors an employer must offer its full-time employees and their dependents the opportunity to enroll in minimum essential coverage and the minimum essential coverage must provide minimum value with respect to self-only coverage offered to the employee. If these conditions are satisfied, an employer may choose to use one or more of the safe harbors for all of its employees or any reasonable category of employees (see section 54.4980H-5(e)(2)(i)).

Under the form w-2 affordability safe harbor an employer’s offer will be deemed affordable if the employee’s required contribution for the employer’s lowest cost self-only coverage that provides minimum value does not exceed 9.61 percent of that employee’s form w-2 wages (box 1 of the form w-2) from the employer for the calendar year. In order to utilize the form w-2 safe harbor the employee’s required contribution must remain a consistent amount or percentage of all form w-2 wages during the calendar year or during the plan year for plans with non-calendar year plan years (see section 54.4980H-5(e)(2)(ii)). Nothing in the final regulations requires the form w-2 affordability safe harbor to be “used for all months of the calendar year for which the employee is offered health coverage” as the instructions to the Form 1095-C currently require.

A simple change to the language in the instruction from “calendar year” to “plan year” would solve this problem. The instructions would read “If an ALE Member uses this safe harbor (referencing the form w-2 affordability safe harbor) for an employee, it must be used for all months of the plan year for which the employee is offered health coverage.” The IRS even requires the employer to submit the plan start date month on the Form 1095-C. There could be issues for employers who sponsor two health plans with different plan years but that scenario is rare and would impact few employers.

Thinking about the examples above again, if an employer completes lines 14, 15, and 16 with the 1E/$150.00/“Leave Blank” code combination, it will be an indication that the employer could be subject to a section 4980H penalty. It is true that the $150.00 amount entered on line 15 should give the IRS sufficient information to determine if the offer of coverage was “affordable.” However, the employer is assuming that coverage is not “affordable” if line 16 is left blank which is in direct conflict with the clear language of the rules and regulations. By being unable to insert code 2F on line 16, ABC Inc. is not being provided the opportunity to tell the IRS that it is eligible to use the form w-2 affordability safe harbor. This is wrong.

While an employer would be able to raise the affordability safe harbor with the IRS in an appeal, an employer should not be forced into a position to have to first bring up the form w-2 affordability safe harbor on appeal. The alternative, which could be a worse option, would be to ignore the instructions and combine code 2F with code 2C despite clear instructions indicating this should not be done. This alternative could be worse because it could subject the employer to a $520 penalty for completing a Form 1095-C with impossible code combinations across multiple months ($260 for failure to provide a correct payee statement to the employee and $260 for failure to file a correct information return to the IRS). Given these two options, the first appears to be the lesser of two evils although it is far from ideal.

Hopefully, the IRS will clarify this issue in the 2022 iteration of the Forms 1094-C and 1095-C instructions. It is our strong opinion that the restrictive language should be removed from the 2022 instructions. However, if the IRS does not agree, the language should discuss the topic in terms of a “plan year” as opposed to a “calendar year.” Regardless of how an employer is completing the Form 1095-C, a high level of attention needs to be paid to lines 14, 15, and 16. These lines tell the IRS a 12-chapter narrative about an employee that will impact an employer’s section 4980H penalty exposure. If inaccurate code combinations or impossible code combinations are entered, an employer could be subject to penalties and would likely be enhancing its chances of an audit. Accord takes the accuracy of its software extremely seriously and has created tools that help ensure its clients file a Form 1095-C with 12 perfect months of code combinations that tell an accurate narrative to the IRS. Should you have any additional question, please don’t hesitate to 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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