November 13, 2017
The IRS took another big step in the enforcement of the employer mandate penalty by releasing a sample Letter 226J. As discussed in a previous article, the IRS plans to provide a Letter 226J to each Applicable Large Employer member (ALE member) it believes owes an employer mandate penalty (or an Employer Shared Responsibility Payment (ESRP) as the Letter 226J references the penalty). This article discusses what new items the IRS disclosed in the sample Letter 226J.
The sample Letter 226J disclosed that the IRS package will come with several additional items. The package containing Letter 226J will include Publication 1 and Notice 609 which describe rights entitled to taxpayers. The IRS package will also include Form 14764. Form 14764 is the vehicle ALE members will use to respond to the Letter 226J regardless of whether the ALE member agrees or disagrees with the proposed penalty amount. Additionally, the IRS package will include Form 14765 which will contain a list of the ALE member’s assessable full-time employees for the year in question. The Form 14765 will also include the code combinations the ALE member entered on lines 14 and 16 of the Form 1095-C for each assessable full-time employee. Finally, the IRS package will contain an envelope for use in the ALE member's response.
The Form 14765 will include the name and truncated social security number of each full-time employee who satisfies a three-pronged test:
- The ALE member filed a Form 1095-C on behalf of the full-time employee;
- The employee received a premium tax credit for one or more months for the tax year in question; and
- The ALE member did not report on the Form 1095-C an affordability safe harbor or another relief provision from the employer mandate penalties for one or more of the months the employee received a premium tax credit.
If an employee satisfies the three-pronged test, the employee will be referred to as an assessable full-time employee. Every employee on the Form 14765, under the IRS’ initial review, triggered a section 4980H penalty for at least one month for the tax year in question. The Form 14765 will indicate which months the assessable full-time employee triggered an employer mandate penalty by not highlighting the month.
If an ALE member does not agree with the penalty assessed in the Letter 226J as a result of errors in either the Form 1094-C or the Forms 1095-C, an ALE member should not correct the Forms with the IRS. Instead, the sample Letter 226J instructs the employer to make the appropriate changes on the Form 14765. The sample Letter 226J reveals that each assessable full-time employee listed on the Form 14765 will have two rows associated with him/her for each of the 12 calendar months in the year. The first row for each of the 12 calendar months will reflect the codes, if any, that the ALE member entered on lines 14 and 16 of the Form 1095-C. If the ALE member determines that the code combination in the first row does not accurately reflect the employee’s situation, the ALE member will insert the new correct code combination in the second row for the calendar month. However, the sample Letter 226J instructs that if more than one code combination for lines 14 and 16 could apply, the ALE member is required to list the employee’s name, the applicable months, and the additional code combinations that could apply for each month in a signed statement. This is a departure from the Form 1095-C instructions and will add a great deal of complexity as a month will frequently have several line 16 codes that could apply. Any employer wishing to utilize the second row in a calendar month on the Form 14765 to correct an assessable full-time employee’s line 14 and 16 code combinations, needs to contact an attorney who is familiar with the complexities of the Form 1095-C.
The sample Letter 226J also provided the first glimpse of the ESRP Summary Table as well as a description of the table. It is important to understand the position the IRS is taking in the ESRP Summary Table if an employer did not complete certain information on the Form 1094-C. First, if column (a) of Part III of the Form 1094-C was left blank by the employer for any month, the IRS is taking the position that the employer answered “No”. This default position will make the ALE member liable under section 4980H(a) for any month the ALE member has an assessable full-time employee.
Additionally, if an ALE member did not complete column (b) in Part III of the Form 1094-C for all the months, the full-time employee count reflected in column (b) of the “ESRP Summary Table” will be the total number of Forms 1095-C the ALE member filed. This total likely significantly overestimates the ALE member’s full-time employee count for the month. However, if an ALE member did not complete column (b) in Part III of the Form 1094-C for certain months for the year in question, the full-time employee count reflected in column (b) of the “ESRP Summary Table” will be the greatest number of full-time employees the ALE member reported for any one month of the year in question. This is a generous position by the IRS and it could, although it is not likely, work in favor of ALE members who left column (b) in Part III of the Form 1094-C blank for certain months. Knowing these default positions it is critical that a thorough review of each ALE member’s Form 1094-C be performed before paying any penalty proposed in a Letter 226J.
An interesting new piece of information contained in the sample Letter 226J is that the IRS deems the Letter 226J, presumably through the Form 14765, as a notice under ACA section 1411. This is critical because both the section 4980H(a) penalty and the section 4980H(b) penalty require the ALE member to receive a section 1411 notice before any penalty is assessed. What is troubling is the section 1411 notice described in the sample Letter 226J falls short of the notice described in section 1411 of the ACA.
Section 1411 of the ACA requires the State and Federal Marketplace Exchanges to provide an employer the name of each employee who received a premium tax credit. Section 1411 does not limit the notice to full-time employees. Therefore, it was reasonable for employers to expect a section 1411 notice for part-time employees, variable hour employees, and seasonal employees in addition to full-time employees. The notice was supposed to warn employers of the potential for penalties under section 4980H as one or more of their employees were receiving premium tax credits. Employers could have used the notice to eliminate or reduce their section 4980H exposure in future months if it was provided in a more timely fashion.
The problem for the IRS is the Exchanges did not send out a single section 1411 notice in 2015. The government, through the Centers of Medicare and Medicaid Services, has already admitted no section 1411 notices were sent by the Exchanges in 2015 in a FAQ released in September 2015. Despite no section 1411 notices being sent by the Exchanges in 2015 the FAQ made it clear that the IRS will independently determine any liability for an employer under section 4980H without regard to whether a section 1411 notice was issued. This goes directly against the plain language of section 4980H and eliminates a protection the ACA had in place to warn employers of a potential employer mandate penalty. While it is hopefully not an employer’s best appeal option, there is a credible argument that no employer should be liable under section 4980H in 2015 because a legitimate section 1411 notice was never provided by an Exchange.
The IRS' release of the sample Letter 226J is a strong signal that the employer mandate penalty notices are imminent. Any ALE member who receives a Letter 226J must respond by the “Response date” listed at the top right corner of the first page of the Letter 226J which will typically provide 30 days for the ALE member to reply. Any ALE member wishing to appeal the Letter 226J should contact an attorney who is an expert on the Forms 1094-C and 1095-C. Moving forward, ALE members should concentrate on filing the Forms 1094-C and 1095-C accurately the first time for each ALE member. Please contact us and we can share information regarding our proprietary software that will disclose each assessable full-time employee before you file or if you have any other questions regarding your ACA filing obligations.
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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