June 17, 2022
The second installment in our series focuses on issues some employers are having with line 15. Many employers are receiving unwelcomed Letters 226J with proposed penalties under IRC section 4980H. These letters include a Form 14765 with the IRS disallowing the Form W2 affordability safe harbor by placing an XF on line 16 as opposed to the employer’s entry of 2F. The employees listed on the Form 14765 went to an exchange and were deemed eligible to receive a premium tax credit. As a result of the IRS disallowing the employer’s attempt to utilize the Form W2 affordability safe harbor by placing 2F in line 16, the IRS is penalizing the employer under IRS section 4980H for not having offered affordable coverage. Frequently, the cause of the error is due to a mistake by the employer or the employer’s service provider. This is leading to a waste of IRS and employer resources through appealing the IRS proposed penalties. For these reasons the IRS should allow an employer to put the line 15 amount as a percentage of an employee’s box 1 Form W2 wages if the employer’s offer is stated to the individual in such a fashion.
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)). Many employers have adopted this strategy as it gives employers assurance that their offers of coverage will always be affordable under the Affordable Care Act (ACA). Therefore, in 2022 if an employer offered a plan that provided minimum value at the cost of 9.61 percent of the employee’s box 1 Form W2 wages, the coverage would be considered affordable. Employers who offer individuals coverage expressed as a percentage of the employee box 1 Form W2 wages should be able to place the percentage in lieu of a line 15 dollar amount to simplify the Form 1095-C for employers so long as the coverage fell at or below the applicable affordability threshold for the year.
By allowing employers to express line 15 as a percentage, the IRS will significantly cut down on unnecessary IRS proposed penalties that eventually end up with the employer paying no penalty once everything is clarified. This will prevent IRS and employer resources from being wasted. While it is frustrating that many employers have been unable to accurately present a line 15 total, we don’t foresee that changing in the future. When an employer makes an offer expressed as a percentage of an employee’s box 1 Form W2 wages, the employer or service provider completing the Form 1095-C needs to have an accurate box 1 Form W2 wage to accurately state the line 15 total. The calculation is simple, but the problem is the service providers making the calculation are often not privy to the box 1 Form W2 amount for all of the individuals receiving a Form 1095-C. This is leading to inaccurate totals being entered on line 15.
In a perfect world the service provider performing the Form 1095-C reporting would be integrated with the system creating the Forms W2. However, as I have seen this occur countless times in private practice, this is simply not occurring. Allowing employers to express line 15 as a percentage of box 1 Form W2 wages will solve this problem and the IRS can then accurately assess who owes a penalty under IRC section 4980H.
While IRC section 6056(b)(1)(C)(iii) requires the Form 1095-C to state the “monthly premium for the lowest cost option” for each individual, the current instructions do not always require this so long as certain conditions are satisfied. For example, an employer who uses the 1A code, the qualifying offer code, on line 14 does not need to complete line 15. The reason line 15 does not need to be completed in these circumstances is the individual listed on the Form 1095-C cannot trigger a section 4980H penalty for that month under any circumstances. Similarly, an individual who is offered coverage at or below the applicable affordability percentage, 9.61 percent for 2022, cannot trigger a section 4980H penalty for that month. As a result, the IRS should allow employers to express line 15 as a consistent percentage of the individual’s box 1 Form W2 wages if coverage was offered in that fashion.
The IRS should allow employers who offer coverage to individuals expressed as a percentage of the employee’s box 1 Form W2 wages to state line 15 as a percentage of the employee’s Form W2 wages. This will simplify the process for employers and will allow the IRS to more accurately determine who owes a section 4980H penalty. Furthermore, the IRS will still be able to determine the line 15 amount expressed as a dollar amount as it has access to the Form W2 information. 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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