September 4, 2018
As the surge of employers receiving a Letter 226J continues some employers have received a different letter, a Letter 5699, from the IRS related to the Affordable Care Act (ACA). A Letter 5699 is the vehicle the IRS is using to inquire about an employer’s reason for not filing the Forms 1094-C and 1095-C with the IRS in previous years. This article explains the Letter 5699, reviews when an employer must file the Forms 1094-C and 1095-C, and discusses other considerations an employer should make when responding to the Letter 5699.
The Letter 5699
The Letter 5699 will always arrive to an employer via mail. The letter contains the following important information in the top right corner:
- The date the letter was sent
- The taxpayer ID number
- The tax year(s) in question
- An IRS person to contact with any questions
- The employee ID number
- A contact telephone number
- A contact e-fax number
This information is pertinent for myriad reasons. First, the date will be critical as an employer has 30 days to respond to the letter. The taxpayer ID number will allow the employer in question to verify it is the correct entity being contacted by the IRS. The tax year will inform the employer which tax year(s) are in question. Finally, the name of the IRS agent and contact information will provide the employer (or the employer’s attorney) with a contact at the IRS with whom to correspond.
The letter then informs the employer that the IRS believes it may have been an Applicable Large Employer (ALE) for the tax year(s) in question and, as a result, certain reporting requirements were due but have yet to be received by the IRS. The letter includes a discussion of the rules and provides search terms for the employer to use to learn more about whether it is an ALE for the tax years in question.
The Letter 5699 provides an employer 30 days to respond to the letter using one of the following five options:
- The employer was an ALE for the tax year(s) in question but filed its Forms 1095-C with a different entity;
- The employer was an ALE for the tax year(s) in question and is including the Forms 1094-C and 1095-C with its response to the Letter 5699 (note this is only an option if the employers has fewer than 250 Forms 1095-C);
- The employer was an ALE for the tax year(s) in question and will be filing the Forms 1094-C and 1095-C with the IRS by a specified date (not more than 90 days from the date on the Letter 5699);
- The employer was not an ALE for the tax year(s) in question; or
- Another reason with a statement explaining why the employer has not filed the Forms 1094-C and 1095-C and the actions the employer plans to take to remedy the situation.
Reviewing the five possible responses it is clear some of the responses are more problematic to an employer than others. The remainder of the article explains some of the information that is necessary for an employer to consider before responding and explains some of the possible problems an employer may face.
The Good
The first inquiry to determine before responding to a Letter 5699 is to determine if the employer was an ALE for the tax year(s) in question. An employer’s ALE status is based on the prior calendar year’s hours of service. When calculating an employer’s ALE status, the controlled group rules apply. Therefore, an employer should be careful and consult an attorney if there are parent and/or subsidiary arms associated with the employer. The simplest approach for an employer to determine if it was an ALE involves two steps:
- Add the hours of service accumulated by an employer’s workforce for the calendar month; and
- Never include more than 120 hours of service in any calendar month for an employee.
Apply the two rules and divide the number by 120 to get an employer’s ALE number for a calendar month. After an employer does this for all 12 calendar months in a calendar year add the total and divide by 12. If an employer’s number is 50 or more, it is an ALE unless the seasonal worker exception applies.
The IRS provided transition relief for an employer determining its ALE status for 2015. The transition relief allows an employer to use any period that is at least six consecutive calendar months to determine its ALE status for 2015. As a result, an employer has 28 options for determining its ALE status for 2015. In 2016 and beyond there is only one way for an employer to determine its ALE status based on the previous calendar year’s hours of service. If an employer was not an ALE for the tax year(s) in question, it is simple to respond to the Letter 5699. It is safe to assume any employer who is responding that it was not an ALE for the tax year(s) in question was close to the ALE threshold. Therefore, the employer should be cognizant of the ALE rules for future years.
The Next Best Thing
The next best outcome for an employer receiving a Letter 5699 is for the employer to have filed the Forms 1095-C with a different ALE member in its controlled group. The ACA requires each ALE member to file its own Form 1094-C along with its own Forms 1095-C. This is a fact that many employers and vendors overlooked. If an ALE member filed its Forms 1095-C under a different entity name for the tax year(s) in question, the employer should respond to the Letter 5699 with the name and EIN of the entity the Forms 1095-C were filed along with the date the Forms 1095-C were filed. In future years an employer should file a Form 1094-C for each EIN along with the appropriate Forms 1095-C for that particular EIN. At this time it does not appear that the IRS is requiring an employer to refile the Forms 1095-C with the correct entity name and EIN but if instructed by the IRS the employer should follow the proper corrections protocol.
The Bad
If it turns out the IRS is correct and the employer has not filed the Forms 1094-C and 1095-C for the tax year(s) in question, there could be serious consequences. In the bad scenario, the employer will have offered 95 percent (70 percent in 2015) of its full-time employees (and their dependents) minimum essential coverage. As a result of offering coverage, filing the Forms 1094-C and 1095-C will not expose the employer to the section 4980H(a) penalty. However, as the Letter 5699 states, the employer still could be subject to a penalty under IRC section 6721 for failure to file a timely return. Depending on the tax year(s) in question this penalty can be up to $260 per return (that’s potentially $260 per Form 1095-C). Remember an employer also had an obligation to furnish the Form 1095-C to each full-time employee. This is unlikely to have happened if no Form 1095-C was filed with the IRS. Consequently, the IRS could seek a similar penalty (up to $260 per return) under section 6722 of the Code for failure to timely furnish an information return to an individual. Fully cooperating with the IRS could lessen or eliminate a potential penalty under sections 6721 and 6722. Therefore, a prompt response and filing of the Forms 1094-C and 1095-C to the IRS is essential.
The Ugly
In the worst case scenario the employer will have failed to offer 95 percent (70 percent in 2015) of its full-time employees (and their dependents) minimum essential coverage. Consequently, when the employer files the Forms 1094-C and 1095-C with the IRS in an untimely fashion it could be exposed to not only the penalty amounts discussed above under sections 6721 and 6722 of the Code but also to the penalty amount under section 4980H(a).
To illustrate the magnitude of the penalty consider an employer who failed to offer its 200 full-time employees coverage in 2015 and 2016. The IRS sends the employer a Letter 5699 and it turns out that the employer never filed the Forms 1094-C and 1095-C with the IRS. For 2015 the employer could owe a penalty of $249,600 ($2080 x (200 – 80)) and for 2016 a penalty of $367,200 ($2160 x (200 – 30)) under section 4980H(a). That’s a total penalty amount of $616,800 without even considering any penalty that could be assessed under sections 6721 and 6722 of the Code. That’s a crippling penalty amount for any small employer.
An employer in this worst case scenario situation must respond to the letter in the hopes of lessening its exposure under sections 6721 and 6722 of the Code. It is possible the employer got lucky and no full-time employee received a premium tax credit for some of the months in question. This would lessen the section 4980H(a) exposure. Before responding to the Letter 5699 an employer in this situation would be shrewd to consult with an attorney who is an expert with the ACA’s reporting obligations to see what avenues exist to lessen the employer’s exposure.
Conclusion
An employer who receives a Letter 5699 must assess which bucket it falls in to and proceed accordingly. Regardless of the scenario a prompt response to the IRS is necessary. Please contact us if you have any questions regarding the Letter 5699 or if you need assistance filing the Forms 1094-C and 1095-C for past, current, or future years.
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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