May 23, 2023
In private practice I was recently working on a Letter 226J appeal for the 2018 calendar year when I came across something I had not encountered before that troubled me. The enclosed Form 14765 included an employee who had worked and been offered minimum value coverage along with the employee’s spouse and dependents for all 12 months of the year. Therefore, line 14 was completed with 1E. The employer attempted to use the Form W2 affordability safe harbor but the IRS disallowed the safe harbor because the employee’s line 15 amount was greater than 9.56 percent (the affordability threshold for 2018) of the amount entered in box 1 of the employee’s Form W2.
However, the amount entered on line 15 was inaccurate which is entirely the fault of the employer and the employer’s service provider. In this case, the employer had actually offered coverage to the employee in question at 9.5 percent of the employee’s box 1 Form W2 wages. As a result, the coverage was affordable. This strategy is allowed by the final regulations and is often the best way to ensure coverage is always affordable to a workforce that is paid an hourly wage with hours that fluctuate. Unfortunately, the service provider (who was not Accord Systems to be clear) was unable to accurately calculate the proper line 15 amount. As a result, the IRS disallowed the Form W2 affordability safe harbor and marked the Form 14765 with an “XF”.
All of that above is not that interesting and it has been seen by every attorney operating in the space. Here is what made this particular case interesting and troubling. The employer forwarded me the amount that was incorrectly entered on line 15 for the Form 1095-C that was submitted to the IRS and it was $95.10 for all 12 months. To understand why that amount is interesting and troubling it is important to understand footnote 9 in the preamble to the final regulations for the Employer Shared Responsibility Payments.
Footnote 9 beautifully explains why an individual can never trigger a penalty if certain parameters are met by stating “For an employee offered coverage for all 12 calendar months of the year, the total cost for the year will be no more than 9.5 percent of the federal poverty line for a single individual. Thus, regardless of the size of the employee’s household or the level of other income or loss of any member of the employee’s household, either the employer’s coverage will be affordable for purposes of the premium tax credit or the employee’s household income will be less than 100 percent of the federal poverty line and the employee will not be eligible for a premium tax credit.”
In other words, if the employer’s offer of minimum value coverage to an employee is less than or equal to the product of the federal poverty line and the affordability threshold for that particular year, the employee cannot trigger an ACA penalty. This is the logic behind the federal poverty line affordability safe harbor. However, the statement is true even if the employer does not insert the federal poverty line affordability safe harbor code, 2G, in line 16 of the Form 1095-C.
For 2018, the mainland federal poverty line amount was $12,140. The affordability threshold for 2018 was 9.56 percent. Therefore, an individual was eligible to use the federal poverty line safe harbor if the line 15 amount was less than or equal to $96.71 (0.0956 * ($12,140 / 12)). If the employer entered an amount less than or equal to $96.71 on line 15 for the 2018 plan year, that employee cannot trigger a section 4980H penalty for that month because of the logic discussed in footnote 9 above.
What is troubling is the IRS is apparently attempting to penalize employers under Internal Revenue Code (IRC) section 4980H on grounds there is no basis for under the law. This type of abuse has also been seen repeatedly in the Service’s enforcement of IRC section 4980H. As we discussed in great length in our previous article, the IRS is not checking household income prior to proposing penalties to employers. The issue highlighted in this paper could be viewed as a subset of this issue although I would have expected parameters to be in place where employers were not proposed a penalty if the line 15 amount was less than or equal to the federal poverty line threshold. Additionally, the IRS has been ignoring one of the clear requirements of IRC section 4980H that an employer receive a section 1411 notice within a reasonable time from the Exchange when one of its employees receives a premium tax credit or cost-sharing reduction before being assessed a penalty.
The Service’s aggressive position is costing employers who have had sloppy reporting. Unfortunately, many employers who do not talk to an attorney end up paying a penalty even though there is no basis for the penalty under the law. Even if an employer successfully appeals the penalty, there are frequently legal costs associated with that process.
The enforcement positions of the IRS is out of the control of employers. However, what an employer can control is the accuracy of the Forms 1094-C and 1095-C it submits to the IRS. It has become more and more difficult each year to appeal the IRS penalties and even the ones that are successful are taking more time and being looked at with greater scrutiny. The best solution is to meticulously complete the Forms 1094-C and 1095-C with the proper data on the first try. Accord Systems takes great pride in helping our clients navigate the complexity these forms present and has created proprietary tools to assist our clients in submitting accurate Forms 1094-C and 1095-C. As a result, we have not had a single client who has timely filed using our services run into issues with the IRS!
The Service is clearly proposing penalties to employers in a fashion that is not based on the letter of the law. In light of this fact, the Service needs to publicly release the details that lead to an employer receiving a Letter 226J. Every employer needs to review the process it is using to complete the Forms 1094-C and 1095-C to ensure accuracy. Any employer who has received a Letter 226J in the past, should likely look at ways to improve its process. If you would like to learn more about how Accord Systems can assist in the creation of accurate Forms 1094-C and 1095-C, please don’t hesitate to reach out. If you are an employer who has paid a penalty as a result of a letter 226J, please contact me directly as there are procedures that can be used to recoup your money.
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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