September 17, 2021
Soon employers will be in the middle of reporting the Forms 1094-C and 1095-C to the IRS for the 2021 reporting season. It is hard to believe, but this will be the seventh year of Affordable Care Act (ACA) reporting. With the reporting season quickly approaching, we thought it was an appropriate time to review five items that are pertinent to 2021 reporting or the offers of coverage employers will be making in the coming months for the 2022 calendar year.
No More Good Faith Effort or Extended Due Date to Furnish Forms to Employees
In all previous years the IRS has released a Notice that has extended good-faith relief for errors made by employers reporting the Forms 1094-C and 1095-C to the IRS. Furthermore, in all previous years the Notice has extended the due date to furnish the Forms 1095-C to employees to at least March 2 (from January 31). However, Notice 2020-76, the Notice that extended the good-faith relief and extended the deadline to furnish the Forms 1095-C to employees for the 2020 reporting season, stated that the good-faith relief and the extension of the deadline to furnish the Forms 1095-C to employees would not continue for tax years past 2020. As a result, employers must be confident that the information reported to the IRS on the Forms 1094-C and 1095-C is complete, meticulous and error free in order to avoid IRS penalties. If your ACA service provider has been unable to perform to this standard in the past, it may be time to look for a different service provider. Furthermore, Notice 2020-76 stated employers should not anticipate the due date to furnish the Forms 1095-C to employees to be extended beyond the 2020 reporting season. Therefore, employers should anticipate having to furnish the Forms 1095-C to the requisite employees by January 31, 2022.
Electronic Reporting Will Soon Be Required
The Department of Treasury recently released proposed regulations that would practically make electronic reporting for the Forms 1094-C and 1095-C mandatory for all applicable large employers beginning with the 2021 reporting season. For returns filed in 2022, employers who are required to file 100 or more Forms 1095-C, Forms 1099, Forms W-2, and many other IRS Forms in the aggregate must file electronically. Any employee who receives a Form 1095-C will also receive a Form W-2 so having less than 100 Forms in the aggregate will only occur in the rarest of circumstances. Except in an extremely odd scenario, this would make electronic filing the Forms 1094-C and 1095-C necessary for the 2021 reporting season which occurs in 2022. In years after 2022, the threshold is reduced from fewer than 100 to fewer than 10.
Accord Systems files all of its Forms 1094-C and 1095-C with the IRS electronically. However, as the IRS continues to push for electronic filing of the Forms 1095-C and other Forms, we urge the IRS to not make subtle changes to the schema from year to year. These subtle schema changes can present challenges when assisting clients file necessary Forms 1094-C and 1095-C in previous years. With electronic filing essentially required, an efficient way to file and correct previous year’s Forms will be essential.
Affordability Threshold in 2022 is Decreasing to 9.61 Percent From 9.83 Percent
For the third time since the ACA was enacted, the affordability threshold will decrease in 2022 compared to the 2021 affordability threshold. The affordability threshold for 2022 is 9.61 percent which is down significantly from the 9.83 percent affordability threshold from 2021. The significant drop in the affordability threshold compared to 2021 places employers who are toeing the line of the affordability threshold in danger of being subject to a potential section 4980H(b) penalty if the price of coverage is not reduced for self-only coverage.
Additionally, the IRS has begun to strictly enforce the section 4980H(b) penalty. The IRS is checking to make sure employers who reported using the Form W-2 affordability safe harbor on line 16 of the Form 1095-C, the 2F code, actually qualified for the safe harbor. This is easy for the IRS to verify as it has access to an employer's Forms W-2. Shockingly, the IRS appears to be penalizing all employers who utilized the Form W-2 affordability safe harbor but actually failed to qualify for the safe harbor. This is against the clear language of the ACA and the accompanying regulations.
As a result of the IRS’s stringent position, employers with a low participation rate should strongly consider utilizing the affordability threshold percentage of 9.61 percent when offering coverage for 2022. 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)). Therefore, an employer could guarantee that it will always meet the Form W-2 affordability safe harbor by utilizing a consistent percentage that is less than or equal to the required contribution percentage (9.61 percent in 2022) for the applicable tax year. If an employee of any employer rejects coverage and signs the offer clearly rejecting the affordable coverage offered, any appeal for that particular employee will be easy.
Full-Time Employees with a Household Income Above 400 Percent of the Federal Poverty Line Can Trigger a Section 4980H Penalty in 2022
In March 2021, President Biden signed The American Rescue Plan into law to assist individuals and employers with the impact of the COVID-19 crisis. Section 9661 of the law significantly expanded the number of individuals who could receive a premium tax credit by amending Internal Revenue Code section 36B(b)(3)(A). The amendment, which is only effective in 2021 and 2022, does away with the 400 percent Federal Poverty Level cap when it comes to determining whether an individual is eligible for a premium tax credit. Consequently, any full-time employee who receives a premium tax credit could trigger a section 4980H penalty. There has been talk in recent weeks of this change being made for future years as part of the infrastructure deal. Employers should continue to monitor this situation and be aware that in 2022 more employees are going to be able to trigger a section 4980H penalty compared to years prior to 2021.
The 4980H Penalties Continue to Increase
The penalty amounts under section 4980H(a) and (b) continue to increase compared to previous years. The Code explains that the original $2,000 amount associated with the section 4980H(a) penalty and the original $3,000 amount associated with the section 4980H(b) penalty would be adjusted for calendar years beginning after 2014 (see IRC section 4980H(c)(5)). The Code tells us that the original dollar amount of each penalty is multiplied by the premium adjustment percentage (PAP) which is defined in a separate section of the ACA (see PPACA section 1302(c)(4)). Furthermore, the Code instructs that the product of those numbers is rounded down to the next lowest multiple of $10 (if the number is not a multiple of $10). The equation is simple once the PAP is known.
In 2022 the PAP is 1.3760126457. Multiplying the PAP by $2,000 produces the number $2,752.03. After applying the rounding rule discussed above, the section 4980H(a) penalty in 2022 will be $2,750 annually which equates to $229.17 per month. Multiplying the PAP by $3,000 produces the number $4,128.03. In 2022 the section 4980H(b) penalty will be $4,120 annually which equates to $343.33 per month.
There were many nuanced changes made to the ACA that could trip up employers with compliance. In light of the IRS more stringently enforcing the ACA penalties with each passing year, employers need to make sure their ACA strategy and reporting is comprehensive and thorough. We continue to hear from employers who have had bad experiences with service providers assisting with ACA compliance or the IRS (or in many cases both). If you have any questions regarding Affordable Care Act reporting or would like to learn more about our services, please 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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