May 4, 2017
On November 2, 2017, the IRS updated a Q&A detailing among other things the employer mandate penalty enforcement procedures. This is a further indication that the employer mandate penalties are imminent. For a summary of the employer mandate penalty enforcement procedures please click here.
It is possible we have finally arrived at the month in which the IRS will begin to assess penalties against employers who fell short of the employer mandate standards under the Affordable Care Act (ACA). Speculation that employer mandate penalties may be assessed in May 2017 are largely based on the recently released Treasury Inspector General for Tax Administration (TIGTA) audit report which referenced several IRS tools required to assess the penalties being launched in May 2017. As a result, a publication explaining how an employer should handle a potential penalty from the IRS is appropriate at this time.
Before we delve into the items that should be reviewed if an employer is contacted by the IRS, let’s first explore what we know about the process of how the IRS will assess a penalty. The first inquiry the IRS will make in its penalty determination is whether an employer is an applicable large employer (ALE). If an employer is an ALE, the IRS will then examine if any of the employer’s full-time employees received a premium tax credit. If the IRS finds an employer’s full-time employee was eligible for a premium tax credit in any month in 2015 and the employer did not offer coverage to at least 70 percent of its full-time employees for that same calendar month in 2015, the IRS would assess the section 4980H(a) penalty against the employer. If the IRS finds an employer’s full-time employee was eligible for a premium tax credit in any month in 2015 and the employer offered coverage to at least 70 percent of its full-time employees for that same calendar month in 2015, the IRS would assess a section 4980H(b) penalty against the employer.
There are certainly several technical deficiencies with the paragraph above, but this is how the penalty process was summarized in the TIGTA report on the IRS’ efforts to implement the employer shared responsibility provision. The good news for employers is the report states the IRS will contact the employer prior to any formal assessment of a section 4980H penalty. The IRS will include the names of the employees who received a premium tax credit and provide the employer an opportunity to respond before providing a formal penalty notice and demand for payment. Unlike the HHS appeals process which had no financial implications for an employer, a response to the IRS will be critically important in determining whether the employer will be assessed a penalty. The remainder of this article explores five items an employer should consider in its initial response to the IRS.
Is the employer an ALE?
The first question an employer should ask is whether it is an ALE. For 2015 there were 28 ways an employer could calculate whether it was an ALE. If using any of these methods an employer was not an ALE, the employer would not be subject to the section 4980H penalties for 2015. The TIGTA report outlines the IRS’ struggle to determine which employer meets the ALE criteria so it is possible many employers who are not ALEs are assessed a section 4980H penalty. This is particularly true in light of the numerous ways an employer had to determine if it was an ALE in 2015.
Are the employees in question full-time employees?
The next relevant question for an employer would be whether the employees listed by the IRS were full-time employees. The first question will be whether the employee in question was an employee in the month for which the IRS is threatening a penalty. Unfortunately, the application process for a premium tax credit did not have proper safeguards to ensure the individual was in fact employed by the employer the individual stated. Theoretically, an individual applying for a premium tax credit could put any employer. Given this fact, the sloppiness with which the HHS appeals process was handled, and the IRS’ software shortcomings discussed in the TIGTA report, we would be skeptical of all names listed by the IRS in any contact information.
If the employee was employed for the months in question, the next inquiry would be whether the employee should be considered a full-time employee. An employer had two options to determine if an employee was a full-time employee under the ACA. The default option, the monthly measurement method, simply asked whether the employee accumulated 130 hours of service in the calendar month. Alternatively, if the employer elects, an employer could use the look back measurement method to determine an employee’s full-time status. The look back measurement method is complicated and is summarized in our three part series examining different aspects of the rules. Interestingly, the IRS has indicated that it is possible to back date the look back measurement method. Therefore, it appears an employer can adopt the look back measurement method to retroactively reduce its section 4980H penalty exposure. If this option is selected, an attorney should be contacted as backdating is typically prohibited so extreme caution is necessary.
What is the employee’s Form 1095-C narrative?
If an employer determines it is an ALE and the employee in question is in fact a full-time employee, the employer should examine the employee’s Form 1095-C. Lines 14, 15, and 16 tell the IRS a 12 chapter narrative about the employee entered on the Form 1095-C. If certain code combinations are entered on lines 14 and 16 such as 1E/2C, 1E/2F, 1H/2D (and many more), the employee would not be able to trigger a section 4980H penalty. However, if the employee has left line 16 blank, it could signal that employee’s ability to trigger a section 4980H penalty against the employer. Whether the penalty would be a section 4980H(a) penalty or a section 4980H(b) penalty would depend on the information the employer entered in part III of the Form 1094-C. An employer will have to methodically review lines 14, 15, and 16 for each employee for each month the IRS is calling into question. Given the complexity of these lines and the various code combinations, it is possible the service provider an employer hired to fulfill its Forms 1094-C and 1095-C reporting told the IRS an inaccurate narrative regarding the employee. If so, a corrected return could alleviate some or all of the section 4980H penalty being assessed.
Was the employee’s coverage affordable under the more lenient household income standard?
Even if line 16 on the Form 1095-C was left blank, it does not necessarily mean the employer will be responsible for a section 4980H penalty. In 2015, for premium tax credit purposes, an employer’s coverage was considered affordable if the employee’s contribution level for self-only coverage did not exceed 9.56 percent of the employee’s household income. Consequently, if an employee has a spouse or dependents, the income of the spouse and dependents are typically aggregated together when determining the employee’s household income.
The government recognized employers usually would not be able to determine an employee’s household income as a spouse’s or dependent’s income in addition to the employee’s income from other jobs and investments are not known by the employer. To assist employers with this problem the government created three safe harbor provisions. But if line 16 is left blank, none of the three safe harbor options will be of use to the employer.
Importantly, none of the three safe harbors factor in household income. Therefore, the employer may be bailed out by the more lenient household income standard. If the IRS is threatening a potential penalty based on the affordability of an employer’s coverage and the alternatives discussed above have not resolved the issue, an employee’s household income is worth exploring. This would be a tricky process given the confidential nature of some variables of household income. Regardless, we present it as an option as we are not confident HHS had the proper software to accurately determine if an individual was eligible for a premium tax credit based on household income.
Did the employer receive a section 1411 notice in 2015 for the employees in question?
A close reading of section 4980H reveals that a requirement of each section 4980H penalty is the employer receiving a 1411 notice certifying a full-time employee of the employer has received a premium tax credit from an Exchange. In 2015 we are unaware of any employer receiving a section 1411 notice from the federal government. Therefore, under a strict reading of section 4980H no penalty should be able to be assessed against an employer for 2015. This is certainly a point worth mentioning if the above options have all failed. Again, if this option is being relied upon, an attorney should be involved.
Regardless of when the an employer is assessed a section 4980H penalty, the five items discussed in this article are all worth exploring. Unlike an employer’s response to HHS which had no financial implications, its response to the IRS will determine if the IRS provides an official notice and demand for payment. Therefore, it is critical that an employer responds to the IRS in an organized, intelligent manner. Please let us know if we can assist in your response process.
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 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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