December 20, 2024
This is part three of a four part series. Please use the links below to view the other parts of the series. Part One – Part Two – Part Three -Part Four (coming soon)
The 2024 reporting season will be the tenth time employers who have been applicable large employers (ALEs) since the Affordable Care Act’s (ACA’s) inception file the Forms 1094-C and 1095-C. While one would expect employers would have mastered how to accurately report the necessary information to the IRS, the truth is almost all employers with a workforce with non-static hours are still struggling to report accurately and, in many instances, in a timely fashion. To complicate matters further, the IRS is struggling to accurately assess the employer shared responsibility payments (ESRP) that are part of the ACA’s jigsaw puzzle for funding the premium tax credits individuals can receive from State exchanges if certain parameters are satisfied. These issues are creating a minefield, leading to legal issues for many employers.
In the third installment of our series, we explore the most egregious error the IRS continually makes when assessing ESRP penalties. The egregious error involves penalizing employers for employees who are clearly not even eligible for a premium tax credit based on the amount the employer inserted on line 15 of the Form 1095-C. Fortunately, a simple computer program can exponentially improve the accuracy of the IRS ESRP process. Before delving into the details of this issue we first must make a brief detour to talk about one of the many exciting ACA provisions – Medicaid expansion.
The ACA includes a provision that allows states to expand Medicaid coverage. While highly politicized in the earlier days of the ACA, 40 states have elected to extend Medicaid eligibility to individuals under 65 years old with incomes up to 138 percent of the federal poverty level (FPL) (see PPACA section 2001). As of December 2024, 40 states and the District of Columbia have implemented Medicaid expansion. Below is a list of these states along with the year the State expanded Medicaid:
2014 - Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Hawaii, Illinois, Iowa, Kentucky, Maryland, Massachusetts, Michigan, Minnesota, Nevada, New Jersey, New Mexico, New York, North Dakota, Ohio, Oregon, Rhode Island, Vermont, Washington and West Virginia
2015 - New Hampshire, Indiana, Pennsylvania, and Alaska
2016 - Montana and Louisiana
2019 - Virginia and Maine
2020 - Utah, Idaho, and Nebraska
2021 - Oklahoma and Missouri
2023 - South Dakota and North Carolina
The States of Alabama, Florida, Georgia, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming have not expanded Medicaid
Internal Revenue Code (IRC) section 36B governs the eligibility for individuals who wish to receive a premium tax credit. Individuals are not eligible for a premium tax credit if they qualify for minimum essential coverage through certain sources such as an employer’s offer of coverage that is affordable. Similar to an employer’s affordable offer of coverage quashing an employee’s eligibility for a premium tax credit, all individuals who are eligible for Medicaid, including Medicaid expansion, are ineligible to receive a premium tax credit (see IRC sections 36B(c)(2)(B) and 5000A(f)(1)(A)(ii).
The IRC sections cited above are the basis for the federal poverty line affordability safe harbor (or code 2G on line 16 of the Form 1095-C). Under the federal poverty line 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 the applicable affordability percentage for the year in question multiplied by the monthly federal poverty line (FPL) for a single individual. An employer should use the Federal Poverty Line for the State in which the employee is employed. This is by far the most ridiculous safe harbor because it is not really a safe harbor at all. Put simply, an individual who is Medicaid eligible can never be eligible for a premium tax credit and can never trigger an ESRP penalty under IRC section 4980H. Tragically, the IRS does not allow employers to take full advantage of the safe harbor and, apparently, neither the IRS or the Exchanges are comparing the line 15 amount reported by employers when determining whether an employee is eligible for a premium tax credit or whether an employer is subject to an ESRP penalty under IRC section 4980H.
The final regulations make clear that all three of the three affordability safe harbors are optional but also restricts how employers can use the safe harbors. The final regulations state:
“Use of any of the safe harbors is optional for an applicable large employer member, and an applicable large employer member may choose to apply the safe harbors for any reasonable category of employees, provided it does so on a uniform and consistent basis for all employees in a category. Reasonable categories generally include specified job categories, nature of compensation (hourly or salary), geographic location, and similar bona fide business criteria. An enumeration of employees by name or other specific criteria having substantially the same effect as an enumeration by name is not considered a reasonable category (see 54.4980H–5(e)(2)(i))
Think about how ridiculous this is when applied to the federal poverty line affordability safe harbor. An employer is not allowed to tell the IRS that the employee cannot possibly be eligible for a premium tax credit because the amount entered on line 15 is less than the applicable affordability percentage for the year in question and the applicable federal poverty line of the State in question. Restricting the use of the Form W2 safe harbor and the rate of pay safe harbor, could arguably make sense. However, restricting an employer’s ability to put the federal poverty line affordability safe harbor code in for any month it is applicable is a poor strategy by the IRS. Furthermore, the IRS strategy holds employers to a higher standard than the law requires particularly in light of the IRS not checking the household income before proposing penalties under IRC section 4980H.
The chart below shows the applicable affordability percentage for each year since the ACA’s inception. Additionally, columns three and four show the applicable federal poverty line (FPL) amount and 138 percent of the applicable FPL for the year in question. Columns five and six take the product of the affordability percentage and the monthly FPL amount or the expanded monthly FPL amount. If an employee is a resident of a State that has not expanded Medicaid and the line 15 amount for the respective employee is less than or equal to the amount in column five of the chart for the plan year in question, the employer should always be able to use the 2G code on line 16! Similarly, if an employee is a resident of a State that has expanded Medicaid and the line 15 amount for the respective employee is less than or equal to the amount in column six of the chart for the plan year in question, the employer should always be able to use the 2G code on line 16!
| Year | Affordability Percentage | FPL | 138% of FPL | Eligible for FPL "Safe Harbor" with No Medicaid Expansion | Eligible for FPL "Safe Harbor" with Medicaid Expansion |
|---|---|---|---|---|---|
| 2015 | 9.56% | $11,670 | $16,105 | $92.97 | $128.30 |
| 2016 | 9.66% | $11,770 | $16,243 | $94.75 | $130.76 |
| 2017 | 9.69% | $11,880 | $16,394 | $95.93 | $132.38 |
| 2018 | 9.56% | $12,060 | $16,643 | $96.08. | $132.59 |
| 2019 | 9.86% | $12,140 | $16,753 | $99.75. | $137.65 |
| 2020 | 9.78% | $12,490 | $17,236 | $101.79 | $140.47 |
| 2021 | 9.83% | $12,760 | $17,609 | $104.53 | $144.25 |
| 2022 | 9.61% | $12,880 | $17,774 | $103.15 | $142.34 |
| 2023 | 9.12% | $13,590 | $18,754 | $103.28 | $142.53 |
| 2024 | 8.39% | $14,580 | $20,120 | $101.94 | $140.67 |
| 2025 | 9.02% | $15,060 | $20,782 | $113.20 | $156.21 |
In private practice I have had the privilege of representing a number of employers who have been penalized in situations where the amount that had been entered on line 15 was less than or equal to the amount in column five of the chart for the plan year in question (I’ve seen line 15 amounts with $90 and some change receive penalties)! An employee with a line 15 amount less than or equal to the column five or six amount pertinent to his/her Form 1095-C based on the plan year in question and the employee's residence are either Medicaid eligible making him/her ineligible for a premium tax credit or, alternatively, eligible for an employer plan that provides minimum value at an affordable rate making him/her ineligible for a premium tax credit. Regardless of which of those two scenarios is occurring for the employee in question, the employee can never trigger a section 4980H penalty! This cavalier enforcement of the ESRP penalties is harmful to employers and the individuals who are improperly receiving the premium tax credits. Additionally, it is a huge waste of government resources which could easily be resolved with software checking the line 15 amounts against the appropriate federal poverty line affordability safe harbor amount.
Understanding why the IRS’s approach is detrimental to employers is not hard to comprehend. Any time an employer receives a proposed penalty in the form of a Letter 226J it forces the employer to spend valuable resources and often leads to an attorney being hired. In the worst-case scenario, the employer who receives the proposed penalty actually pays the penalty when the employer owed no penalty. In the best-case scenario, the employer appeals the decision and receives a revised, accurate proposed penalty. However, in the best-case scenario, the employer has wasted valuable company resources defending itself against a standard that is higher than allowed by the language of the ACA.
Furthermore, and perhaps more troubling given the disparity in resources, the individuals who are triggering the proposed penalty cannot be eligible for a premium tax credit in light of sections 36B(c)(2)(B) and 5000A(f)(1)(A)(ii) and the amount entered on line 15. The law requires individuals who were not entitled to receive a premium tax credit or cost-sharing reduction to repay the government for the benefit the individual was not entitled to receive (see IRC section 36B(f)).
Finally, the IRS is wasting its resources by having employees handle appeals that never should result in penalties. Perhaps the IRS justifies this method as it collects penalties from employers who would not otherwise owe a penalty if the law was followed, but it does so at the cost of stealing the money of individuals pursuing the American dream.
I propose the IRS create software that checks every single line 15 amount against the numbers from the chart above. If the employee’s Form 1095-C reflects a residence for a State that has not expanded Medicaid, the numbers from column five above should be used. Alternatively, if the employee’s Form 1095-C reflects a residence for a State that has expanded Medicaid, the number from column six should be used. This program should be easy to create using the employee’s State input from box 5 of the Form 1095-C and the corresponding line 15 amounts.
If the lofty goal of following the law as written is too ambitious for the IRS, I propose the IRS allow employers to use the 2G code whenever it applies for any employee. As stated in the previous paragraph, this automation should be easy to create with the employee’s State input from box 5 of the Form 1095-C and the corresponding line 15 amounts. Employers and the IRS would be able to focus their resources on more productive activities which everyone should be able to celebrate.
While some readers may find the tone of the last several articles aggressive in nature, it is only as a result of the seriousness of the misapplication of the law. It is reasonable for a person to be furious when the government is not following the law. My private practice has allowed me the opportunity to meet so many great business owners who are living the American dream. These business owners and every American should be able to trust that their government is accurately applying the laws as written that Congress passed and the President signed. Unfortunately, that is not the case with ESRP penalty enforcement which is concerning. There has been a steady trend of the erosion of the meaning of common words in our language over the past decade. If our government allows this trend to seep into the regulatory bodies that interpret the rules and regulations of our society, the law is all but meaningless and we will be at the mercy of the whims of the people that run those regulatory bodies. In a functional society, employers cannot be forced to sue the government to have the government follow its laws.
I will continue to strenuously advocate on behalf of the clients I represent and maintain optimism that this unjustified bullying of employers may eventually be corrected. One of the great rights afforded by our country’s founders was the ability to criticize the government. In circumstances like the one discussed in this article, that right is extremely important to be able to utilize.
The best way to combat the IRS’s aggressive, often times unjustified enforcement of the ESRP penalties is meticulous, accurate reporting. As always, if you have any questions regarding ACA reporting or would like to learn how Accord Systems can assist you with your ACA reporting needs, please don’t hesitate to contact us. We are here to serve our clients with the best technology in the space.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC. 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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