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Final Instructions Make it Impossible to Tell an Accurate Narrative on Each Form 1095-C

October 19, 2016


We recently 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 198 potential code combinations. However, only 39 code combinations are theoretically possible given all of the rules discussed in the final instructions. Each of these 39 code combinations is describing a different scenario for the employee entered on the Form 1095-C. 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 was not changed from 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 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 final instructions in both 2015 and 2016. This is a problem.

To illustrate why this is a problem consider the following 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 – June 30. McGee, a full-time employee, along with his spouse and dependents enroll in the plan offered by ABC Inc. for the 2015 plan year, July 1, 2015 through June 30, 2016. However, for the 2016 plan year, July 1, 2016 through June 30, 2017, McGee declines coverage. 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 first six months 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 final instructions because code 2C was entered on line 16 for one month (six months in this case).

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 2016 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 final 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 9.66 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 final instructions to the Form 1095-C require. There are additional scenarios where code 2F and code 2C could be an accurate narrative. However, for brevity we have elected not to cover them in this publication. This is a large oversight by the final instructions and it could put certain employers in the position to have to appeal a section 4980H penalty to the IRS.

While it is not entirely clear how the assessment of the section 4980H penalty will operate, it is clear the Form 1095-C will be the primary tool the IRS uses to assess the section 4980H(b) penalty. 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 employee’s Form 1095-C will not be indicating the additional protection the employer should be receiving from the form w-2 affordability safe harbor. If an employer is eligible for an affordability safe harbor, its offer of coverage is deemed affordable “even if the applicable large employer member’s offer of coverage that meets the requirements of an affordability safe harbor is not affordable for a particular employee under section 36B(c)(2)(C)(i) and an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to that employee.” (see section 54.4980H-5(e)(2)). 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.

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 final 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 before the close of the year. There are several other discrepancies in line 14, 15, and 16 that should also be clarified and which we may address in future publications. Like many issues presented by these Forms, such as the TIN solicitation issue, it is really hard to get a prompt response from the IRS on how these issues should be handled. In a way, this is understandable as some sort of open forum would undoubtedly bring a flood of simple questions that could be clarified by reading the final instructions and final regulations. However, some formal comment process, similar to the proposed instructions process, would likely be beneficial for the IRS and employers.

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. We would certainly advocate for an automated software system that has been audited. These lines tell the IRS a 12 chapter narrative about an employee that will impact an employer’s section 4980H(b) 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 Attorney's 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 newly created 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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