January 18, 2022
Recently, I have assisted a number of clients in private practice who have had the Form W-2 affordability safe harbor rejected by the IRS. As a result, the IRS has proposed penalties under IRC section 4980H(b). Fortunately, these clients have had good documentation and proof that their offer of coverage was in fact affordable and was within the threshold of the Form W-2 affordability safe harbor for the applicable year. Therefore, we have been able to have the penalties abated to $0. The remainder of this article will provide an overview of the issue as well as provide tips on how to avoid this issue moving forward with reporting.
Many employers are receiving unwelcomed Letters 226J with proposed penalties under IRC section 4980H(b). These letters include a Form 14765 with the IRS disallowing the Form W-2 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 W-2 affordability safe harbor by placing 2F in line 16, the IRS is penalizing the employer under IRS section 4980H(b) for not having offered affordable coverage.
Presumably the IRS is determining which codes 2F to reject by reviewing information the employer submits to the IRS. Each employee who receives a Form 1095-C will also be receiving a Form W-2 from the employer. Importantly, the IRS will also have all of the information on both the Forms. By reviewing the amount in box 1 of the Form W-2, the amount entered on line 15, and plugging in the applicable affordability percentage for a given year the IRS can easily determine if the employer satisfied the Form W-2 affordability safe harbor.
Unfortunately, and shockingly, the IRS is proposing an IRC section 4980H(b) penalty for full-time employees who received a premium tax credit for employers who the IRS deems to have failed to meet the Form W-2 affordability safe harbor. The IRS is taking this position without reviewing an individual’s household income which can be much higher than an individual’s box 1 W-2 wages from a single employer! Our previous publication discussed in detail how absurd the IRS’ position was on this matter and how it went against the clear language of the law. We continue to maintain that position, but will direct interested readers to our previous publication to review the subject more thoroughly. The remainder of this article will discuss how you can avoid the problem all together.
How to Check Your Work
By reviewing the amount entered on line 15 of the Form 1095-C, the amount entered in box 1 of the Form W-2, and knowing the affordability threshold for the applicable year an employer will always know if there Form W-2 affordability safe harbor code will be disallowed by the IRS. The simple equation below will always tell an employer if the IRS will disallow the Form W-2 affordability safe harbor code:
- Line 15 ≤ Amount of Box 1 of the W2 * (1/12) * Applicable Affordability Percentage
The IRS has all of this information too and is checking every single line 15 code with the box 1 Form W-2 amount and the affordability threshold for the applicable year. If a line 15 amount for a month on a Form 1095-C does not pass the test above and the employer enters code 2F on line 16, the IRS disallows the 2F code. This is problematic for the employer if that employee received a premium tax credit. In that scenario, the IRS will issue a section 4980H penalty for the month with respect to that particular employee. An employer will be able to notice this occurring when it sees the code XF on the Form 14765 instead of 2F.
This is disturbing as the IRS is ignoring the clear affordability standard set out by IRC section 36B(c)(3)(v)(A)(1). According to IRC section 36B(c)(3)(v)(A)(1) an employer-sponsored plan is affordable for an employee if the portion of the annual premium the employee must pay, whether by salary reduction or otherwise (required contribution) for self-only coverage does not exceed the required contribution percentage (9.83 percent in 2021) of the applicable taxpayer’s household income for the taxable year. An individual’s household income is the taxpayer’s modified adjusted gross income plus the aggregate modified adjusted gross income of all other individuals who are included in the taxpayer’s family who are required to file a tax return (see section 1.36B-1(e)).
The IRS is skipping the step of looking into an individual’s household income before sending out proposed penalty notices to employers. We were told by a confidential source at the IRS that the IRS will only review an individual’s household income who is triggering a section 4980H penalty if the employer makes the specific request for the IRS to do so. This is an aggressive, ridiculous position being taken by the IRS. However, it is the position the IRS is taking so the best thing an employer can do is know if the line 15 amounts it is submitting will be problematic prior to submitting the Forms 1095-C to the IRS.
A Few Suggestions that May Help Employer Moving Forward
It is imperative an employer reports an accurate line 15 total on the Form 1095-C. An employer should report the lowest-cost, self-only coverage that provides minimum value in which the employee is eligible to participate. It is important for employers to understand that this may not be the plan or type (single versus family) the employee is enrolled. Reporting the line 15 amount accurately will help alleviate some of the problems for employers.
Many employers could also benefit from tying the cost of their lowest-cost, self-only coverage to the affordability threshold percentage for the applicable year. 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 simple. With proper documentation of this strategy any appeal related to the IRS rejecting the Form W-2 affordability safe harbor would be easy.
Many employers have and/or will be receiving a Letter 226J from the IRS with an enclosed Form 14765 which disallows the employers' use of the Form W-2 affordability safe harbor, code 2F. In any appeal in this scenario, the employer should first try to prove with documentation that it met the Form W-2 affordability safe harbor. If the employer actually fell short of meeting the affordability safe harbor, it must ask the IRS to review if the employer’s offer of health coverage was affordable based on the employee’s household income as required by IRC section 36B(c)(3)(v)(A)(1). It is shocking, but the IRS is not doing this for employers prior to proposed penalties. If you are an employer who paid the penalty without making these inquiries, please contact me personally as I have had success reclaiming money from the IRS for clients who had previously paid the IRS ACA penalties.
Employers should be checking their line 15 totals to see if any might be problematic prior to submitting the information to the IRS. Many service providers have taken a cavalier approach to ACA penalties and are not concerned with their clientele receiving massive penalties. We strongly disagree with this misinformed approach and encourage all employers to meticulously report the information required on the Forms 1094-C and 1095-C. If you would like to learn more about our services, including our licensing agreement, or you have any questions regarding ACA reporting, 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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