August 30, 2022
One issue that has been percolating since the IRS began enforcing the employer mandate penalties under Internal Revenue Code section 4980H in late 2017 is whether the IRS even had the authority to do so in light of the fact that very few section 1411 notices were ever provided to employers. The letter 226J the IRS has been providing employers asserts that “the letter certifies, under section 1411 of the Affordable Care Act, that for at least one month in the year, one or more of your full-time employees was enrolled in a qualified health plan for which a PTC was allowed.” But, as discussed thoroughly below, a letter 226J is not and cannot be a section 1411 notice. Furthermore, a close review of the statutory language, the regulations, and the preamble explaining the various regulations make it clear that a section 1411 notice was a precondition to an employer being penalized under IRC section 4980H. As a result, employers who do not receive a section 1411 notice cannot be penalized under IRC section 4980H. Unfortunately, employers continue to not receive an imperative protection granted to them by the Affordable Care Act. This clearly violates employers’ right to due process.
For readers interested in reviewing two original, articulate, concise articles discussing this topic, I would highly recommend Alden Bianchi and Christopher Condeluci’s article “Why the IRS May Be Unable to Assess ACA Employer Shared Responsibility Penalties for 2015” and the letter written by The ERISA Industry Committee regarding the “Enforcement of the Employer Mandate Under the Affordable Care Act”. Both of these writings heavily influenced my thinking on this topic and the arguments presented in this article. In this article I expound upon those writings and thoroughly cite the relevant language of the statutes, regulations, and other pertinent government writings.
The Statute and the Regulations
There are two separate penalties under IRC section 4980H. The first penalty is assessed against an employer who does not offer 95 percent or more of its full-time employees the opportunity to enroll in minimum essential coverage. The statute reads as follows:
(a) Large employers not offering health coverage
(1) any applicable large employer fails to offer to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) for any month, *and*
(2) at least one full-time employee of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee,
then there is hereby imposed on the employer an assessable payment equal to the product of the applicable payment amount and the number of individuals employed by the employer as full-time employees during such month (see (IRC section 4980H(a)).
The second penalty is assessed against an employer who fails to offer coverage that provides minimum value or meet the affordability standards of the ACA. The statute reads as follows:
(b) Large employers offering coverage with employees who qualify for premium tax credits or cost-sharing reductions
(1) In General
(A) an applicable large employer offers to its full-time employees (and their dependents) the opportunity to enroll in minimum essential coverage under an eligible employer-sponsored plan (as defined in section 5000A(f)(2)) for any month, and
(B) 1 or more full-time employees of the applicable large employer has been certified to the employer under section 1411 of the Patient Protection and Affordable Care Act as having enrolled for such month in a qualified health plan with respect to which an applicable premium tax credit or cost-sharing reduction is allowed or paid with respect to the employee,
then there is hereby imposed on the employer an assessable payment equal to the product of the number of full-time employees of the applicable large employer described in subparagraph (B) for such month and an amount equal to 1⁄12 of $3,000. (emphasis added)(see (IRC section 4980H(b))
The italics text above highlights the critical language of the IRC provisions. First, both the IRC section 4980H(a) and (b) penalty have conjunctive requirements. Both penalties require multiple things to occur before the Department of Treasury can penalize an employer. An IRC section 4980H(a) penalty requires that an applicable large employer fail to offer minimum essential coverage to a full-time employee and for the employer to receive a section 1411 notice with respect to one or more employees. The statute is clear that both of these things must occur before the Department of Treasury has the power to assess a penalty under section 4980H(a).
An IRC section 4980H(b) penalty requires that an applicable large employer fail to offer coverage that provides minimum value or meet the affordability threshold and for the employer to receive a section 1411 notice with respect to one or more employees. The flush language for IRC section 4980H(b) is clear that the IRS only has the power to penalize an employer if the employer received a section 1411 notice for that particular employee. The Code provision is clear that there are two things that must occur before the Department of Treasury has the power to assess a penalty under either prong of the employer mandate.
To glean more details regarding the section 1411 notice a review of the text of the Patient Protection and Affordable Care Act (PPACA; also referred to as the ACA in places in this article) is useful. Once a determination has been made that an individual is eligible for an applicable premium tax credit or cost-sharing reduction, PPACA section 1411(e)(1) (also referred to as 42 U.S.C. section 18081(e)(1)) requires the Secretary of HHS to notify the Exchange. Once an Exchange receives such notice, it must notify the employer of the determination and the potential consequences. As the statute clearly and unambiguously states:
(iii) Employer Affordability – If the Secretary (of Health and Human Services) notifies an Exchange that an enrollee is eligible for a premium tax credit under section 36B of title 26 or cost-sharing reduction under section 18071 of this title because the enrollee’s (or related individual’s) employer does not provide minimum essential coverage through an employer-sponsored plan or that the employer does provide that coverage but it is not affordable coverage, *the Exchange* shall notify the employer of such fact and that the employer may be liable for the payment assessed under section 4980H of title 26. (*emphasis added*)(see ( PPACA section 1411(e)(4)(B)(iii) also formally referenced to as (42 U.S.C. section 18081(e)(4)(B)(iii)).
HHS regulations describe how an Exchange must notify employers:
The Exchange must notify an employer that an employee has been determined eligible for advance payments of the premium tax credit and cost-sharing reductions and has enrolled in a qualified health plan through the Exchange within a reasonable timeframe following a determination that the employee is eligible for advance payments of the premium tax credit and cost-sharing reductions in accordance with § 155.305(g) or § 155.350(a) and enrollment by the employee in a qualified health plan through the Exchange (emphasis added). (see 45 C.F.R. section 155.310(h))
Furthermore, ACA section 1411(e)(4)(C) provides that employers receiving an Exchange notice must be informed of their right to appeal eligibility determinations. The statute is clear that the Secretary of HHS shall establish a separate appeal process for the section 1411 notices. The statute states:
(2) Employer Liability
(A) In General. The Secretary shall establish a separate appeals process for employers who are notified under subsection (e)(4)(C) that the employer may be liable for a tax imposed by section 4980H of title 26 with respect to an employee because of a determination that the employer does not provide minimum essential coverage through an employer-sponsored plan or that the employer does provide that coverage but it is not affordable coverage with respect to an employee. Such process shall provide an employer the opportunity to—
(i) present information to the Exchange for review of the determination either by the Exchange or the person making the determination, including evidence of the employer-sponsored plan and employer contributions to the plan; and
(ii) have access to the data used to make the determination to the extent allowable by law
Such process shall be in addition to any rights of appeal the employer may have under subtitle F of such Code. (emphasis added)( see ( PPACA section 1411(f)(2) also formally referenced to as (42 U.S.C. section 18081(f)(2)).
The emphasized language above is clear with regards to the separate appeals rights an employer is entitled to when it receives a section 1411 notice. The emphasized flush language in section 1411(f)(2) could not be clearer that the appeal rights an employer is entitled to with regard to a 1411 notice are separate to and distinct from the appeals rights an employer would have under subtitle F of the IRC for a section 4980H penalty. There are a few reasons the section 1411 appeals process was set up to be distinct from any IRS appeal.
First, and importantly, the section 1411 notice was supposed to be timely as discussed in the regulation above. The reason for this is not only to protect the employer who could amend its offer but also to protect the employee. For example, if it was determined that the employee was ineligible for a premium tax credit or cost-sharing reduction, a prompt PPACA section 1411 notice and appeals process could allow the employee to avoid the repayment of subsidies that were improperly granted (see IRC section 36B(f)). The more promptly the notice is provided to the employer, the less severe the monetary damage will be to the employer or the employee. Not only has HHS infringed upon an employer’s due process rights by not providing a section 1411 notice, the Secretary of HHS has also infringed upon the due process rights of the individuals who were not entitled to receive a premium tax credit or cost-sharing reduction and owe the IRS a tax to repay the government for a benefit the individual was not entitled to receive (see IRC section 36B(f)).
Another reason the statute required a separate section 1411 appeals process is to allow an employer to try to resolve any disputes with regard to whether an individual was eligible for a premium tax credit prior to the IRS proposing a penalty. The appeals process with an Exchange is less intimidating than a letter received from the IRS. Additionally, if the section 1411 notice is implemented properly, the IRS should be able to assess penalties under IRC section 4980H with greater accuracy.
What is particularly frustrating for employers who have not received a section 1411 notice is the compounding nature of their errors. For example, it has been common for employers who were penalized for the 2018 tax year under section 4980H to not receive a letter 226J until the middle of 2021. Most of these employers did not receive a section 1411 notice for any of the employees listed on the Form 14765, which accompanies the letter 226J, despite the clear requirements of section 4980H discussed thoroughly above. Therefore, the first time any of these employers learned of potential ACA problems was in the middle of 2021. As a result, it is common for the issues that occurred in 2018 that led to the employer mandate penalties to also have occurred in 2019, 2020, and 2021. The section 1411 notice and the two-pronged appeals structure was intended to prevent this type of compounding of penalties year after year for employers. However, as a result of the penalties being delayed for myriad reasons and the Exchanges having sent out so few section 1411 notices, many employers who faced penalties in 2018 will also face penalties in 2019, 2020, and 2021. A timely section 1411 notice could have prevented the compounding penalties.
Some employers have received section 1411 notices for employees who went to an Exchange and received a premium tax credit or cost-sharing reduction. Those employers can clearly be penalized under IRC section 4980H so long as the other requirements are satisfied. Those employers were allowed the opportunity to present information to the Exchange for review of the determination either by the Exchange or the person making the determination, including presenting evidence of the employer-sponsored plan and employer contributions to the plan and have access to the data used to make the determination to the extent allowable by law. This is logical as it is what is clearly required by the statute and regulations when an Exchange determines an employee is eligible for a premium tax credit or cost-sharing reduction. It is unfair that some employers are entitled to a section 1411 notice and the accompanying appeals rights and others are not. A uniform application of the penalties and appeals process is necessary to maintain credibility and fairness.
Further proof that the IRS cannot possibly send the section 1411 notice is that HHS was required to send the section 1411 notice to all employers who had an employee who was eligible to receive a premium tax credit or cost-sharing subsidy. As discussed above, it is not just the employer who has had their due process rights violated by these section 1411 notices not going out, but also individuals who were not in fact eligible for the premium tax credit or cost sharing subsidy. The preamble to the regulations titled “”Patient Protection and Affordable Care Act; Establishment of Exchanges and Qualified Health Plans; Exchange Standards for Employers)” states:
Comment: We received a large number of comments on proposed § 155.310(g) regarding the content and scope of employer notices of an employee’s eligibility for advance payments of the premium tax credit and cost-sharing reductions. These commenters suggested that HHS limit employer notices to a subset of employers to provide greater privacy protections for consumers. Most commenters stated that the employer should be notified of an employee’s receipt of advanced payment of the premium tax credit or cost-sharing reductions only if this determination might trigger an employer responsibility payment. Some commenters asserted that the appropriate trigger for an employer to receive notification is if the employer has 50 or more full time equivalent employees and the employer has full-time employees that receive advanced payment of the premium tax credit or cost-sharing reductions through the Exchange. One commenter said that only employers that offer unaffordable coverage should receive a notification and employers that offer no coverage should not receive any employee information.
Response: While we recognize that the employer responsibility provisions of section 4980H of the Code apply only to employers with 50 or more full-time equivalent employees, section 1411(e)(4)(B)(iii) of the Affordable Care Act imposes the obligation to provide the notice regardless of the size of the employer. Therefore, we are not limiting the scope of the notice standard in this final rule to a subset of employers. We anticipate that HHS may provide additional guidance regarding how the content of the notice can be structured so as to minimize potential employer confusion associated with whether a determination will have implications under section 4980H of the Code.
Further, we are aware that employer contact information may not always be available, because a person fails to provide it, or provides incorrect information, or that person changed employers, or a host of other reasons. We will work with Exchanges and employers on this to develop a solution for situations in which the Exchange does not have a seamless way to reach the correct employer for the purposes of delivering the notice. (emphasis added see 77 Fed. Reg. 18310, 18356 (March 27, 2012)).
The response to the comment is important for two reasons. First, it shows that the ACA required all employers, regardless of size, receive a section 1411 notice. In other words, an employer who was not an applicable large employer should also have received the section 1411 notices if one of its employees was eligible for a premium tax credit or cost-sharing reduction. This is further evidence that the section 1411 notice cannot be intertwined with the letter 226J proposing penalties under section 4980H of the Code. An employer who was not an ALE could find the information provided in the section 1411 notice very useful for future years. If an employer who was not an ALE had a large portion of its workforce receiving a premium tax credit or cost-sharing reduction, it should definitely consider that fact when deciding if it wants to offer coverage. It is often the case that an employee is better off being able to go to the Exchange and receive a premium tax credit than have his/her employer offer affordable coverage that provides minimum value thus quashing the employee’s eligibility for a premium tax credit.
The second reason the response to the comment is so important is it shows the government understood there were going to be some issues providing the section 1411 notice. However, the comment states that the government planned to work with Exchanges to figure out a workable solution to get the required section 1411 notice into the hands of the necessary employers. This still has not happened!
The IRS Changed its Position, But It Lacked the Authority To Do So
In 2015 the first signs of the government shifting its position against the clear language of the statute began to appear. That year CMS released an FAQ which stated “The IRS will independently determine any liability for the employer shared responsibility payment without regard to whether the Marketplace issued a notice or the employer engaged in any appeals process.” (see question 3 in the FAQ). The FAQ went on to state that the Exchanges being run by the federal government would only be providing the section 1411 notices “to employers whose employees received APTC (advanced premium tax credits) in 2016 and whose employees provided the Marketplace with a complete employer address.” (see question 4 in the FAQ). The FAQ final question stated that the relevant stakeholders would be informed of how the required section 1411 notices would be sent out in subsequent years once CMS determined the best way to expand and improve the process (see question 10 in the FAQ). The process still has not improved for the 2020 penalties (that is the year the IRS is currently penalizing).
Without question there were many hoops the government needed to hop through before the IRS had the ability to issue penalties under section 4980H. The process was long and cumbersome and the government agencies tasked with those responsibilities understood the effort it was going to take to achieve that goal. In a publication titled "Verification of Access to Employer-Sponsored Coverage Bulletin" dated April 26, 2012, HHS requested comments on several challenges that it was already thinking about regarding the section 1411 notices. Unfortunately, the government was unable to create a system that overcame the obstacles to meet those challenges.
Similarly, employers had to hop through just as many, if not more, hoops in order to avoid ACA penalties. Employers had to coordinate information from medical plans, payroll systems, and navigate a complicated new reporting system just to avoid penalties. It cannot be argued by the government that the penalization process is too complicated and too burdensome on the government while at the same time forcing employers to comply without the full protections provided to employers by the applicable statutes. Every employer who has to comply with the reporting requirements of the ACA has had to learn how to meet all the statutory requirements. The IRS appears to be saying “do as I say not as I do” and ignoring a key protection the ACA provided employers.
It is clear the IRS, HHS, or CMS does not have the constitutional power to amend the clear language of IRC section 4980H or PPACA section 1411. For this to occur the legislature would have to act and the President would need to sign the new bill that amended those provisions to make it a law.
It is unclear why the IRS believes it has the power to send section 1411 notices and incorporate notices into its letter 226J. However, a possible argument in favor of the IRS has been that the HHS regulations published in 2013 referred to “methods” the IRS would adopt to certify the eligibility determination as part of its independent authority to determine employer liability (see 45 C.F.R. section 155.310(i)). But, as pointed out in the letter written by the ERISA Industry Committee, the preamble to those regulations specifically state the certification added by 45 C.F.R. section 155.310(i) “would be distinct from the notice to employers required by section 1411(e)(4)(B)(iii) of the Affordable Care Act and paragraph (h) of § 155.310” (see 78 Fed. Reg. 42160, 42250 (July 15, 2013)). Therefore, it is clear that this narrative is false. Regardless, as stated above, to change the requirements of IRC section 4980H and/or PPACA section 1411 the proper legislative procedures would need to be followed.
A separate counterargument was proposed by Bianchi and Condeluci. They pointed out that there have been instances where the Supreme Court has not read the ACA too literally. In King v. Burwell the court upheld the parameters of premium tax credits to qualifying individuals in all 50 states despite clear language in the statute that reference to an Exchange having to be setup by a state. However, Bianchi and Condeluci distinguish the section 1411 notice issue because the statute and regulations are so clear that the section 1411 notices must come from an ACA Exchange and not the IRS. As discussed extensively above, there was an important role the section 1411 notice was supposed to play for employers.
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. This is dangerous. If the government wishes to change the law, it must do so through the proper procedures.
The statute and the accompanying regulations could not be clearer. An employer must 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. If an employer does not receive a section 1411 notice within a reasonable time, the employer cannot be penalized under section 4980H. If an employer is penalized under IRC section 4980H without a section 1411 notice being provided within a reasonable time frame, the employer’s due process rights have been violated and a clear protection that was inserted into the PPACA to protect the employer has been ignored.
The IRS needs to immediately cease sending out letters 226J to employers who have not received a section 1411 notice within a reasonable time period for one or more full-time employees. Furthermore, the IRS needs to refund and pay interest to every employer who has paid a penalty under IRC section 4980H without receiving a section 1411 notice. If you or one of your clients have received a letter 226J without having received the required 1411 notice, please contact me directly. Furthermore, if you or one of your clients paid a penalty under IRC section 4980H for any year to date, please contact me directly. 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.
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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