November 9, 2016
This is the first in a series of articles regarding reporting under the Affordable Care Act in light of the election. Please enter your email above should you wish to receive future publications.
The election of President Trump on Wednesday morning created new complications and uncertainty in the already complex world of the Affordable Care Act (ACA) and, in particular, ACA compliance in 2016. In this article we explore the four possible outcomes that may occur with regard to 2016 reporting. As the math below shows, the logical choice for all employers is compliance with the ACA reporting requirements in 2016.
After the election, there are still only two possible courses of action for an employer to take with regard to ACA compliance. An employer has the option to comply with the law and regulations that remain unchanged despite the election. This is the best course of action for all employers to follow as there is no risk of an employer being subject to penalties for non-action. Alternatively, an employer could ignore the law and regulations and not comply with the ACA reporting requirements in 2016. The second option comes with significant financial risk.
Similarly, the government will have two courses of actions it could take after the election. The government could continue to enforce the ACA reporting requirements as required by law and the accompanying regulations. This is the government’s likely course of action because the government has already provided premium tax credits in 2016 to individuals. The funding mechanism for the premium tax credits is the section 4980H penalties which the government determines in part through the Forms 1094-C and 1095-C. Therefore, the ACA reporting by employers through the Forms 1094-C and 1095-C is necessary to determine which employers owe a penalty to fund the premium tax credits. Alternatively, and unlikely, the government could ignore the ACA reporting requirements and give any employer who does not comply with the law a free pass on any penalties. This unlikely scenario would pile on to an already enormous deficit, something Republicans have voiced concern over for years.
Combining the two employer options with the two government options we are left with four possible outcomes for an employer. First, an employer could comply with the law and the government could enforce the ACA reporting requirements as required by law and the accompanying regulations. Complying with the law as it is currently written does not expose the employer to any risk.
Second, an employer could ignore the ACA reporting requirements and the government could enforce the ACA reporting requirements as required by law and the accompanying regulations. An employer can be penalized $260 per return for failing to file a correct information return (the Forms 1094-C and 1095-C filed with the IRS). Similarly, an employer can be penalized $260 per statement for failing to provide a correct payee statement (the Form 1095-C that must be furnished to certain employees by January 31, 2017). Each penalty is separately capped at $3,193,000. However, these penalties can be increased if there is intentional disregard for the filing requirements. If the government finds there was an intentional disregard for the filing of the Forms 1094-C or 1095-C, the penalties are each separately increased to at least $530 per return. The penalty can be greater based on other tax provisions that go beyond the scope of this article. To make matters worse, there is no cap on the penalty if there is an intentional disregard for the filing. In the worst case scenario, an employer intentionally does not provide the Form 1095-C to the individual or file the Form 1095-C with the government which could subject the employer to a penalty of $1,060 for just a single employee!
Third, an employer could comply with the law and the government could ignore the ACA reporting requirements. In this unlikely scenario, the employer would have done unnecessary compliance work. However, as discussed above, the risk of being wrong could bring a penalty of $1,060 per Form 1095-C that needed to be filed. Considering the cost to file a Form 1095-C is less than $5 (Accord’s price is $1.95 per Form but we are using a more expensive, conservative estimate) a math equation can easily be setup to understand how an employer should be viewing the risk of a penalty as a result of noncompliance. Let’s assume the penalty for not filing a Form 1095-C is $1,060 and the cost of filing a Form 1095-C is $5. The variable “x” would represent the chances of an employer being assessed a $1,060 penalty. The equation would look like this:
In a rational market, if the chances of x are equal to or greater than a half percent, an employer would choose to pay the $5 compliance fee rather than risk paying the $1,060 penalty. While this example may oversimplify things a little, it is clear that the delta between the penalty for noncompliance and the low cost of compliance makes the rational choice of compliance the clear strategy. Additionally, the chances of the IRS enforcing the penalties for not filing the Form 1095-C are much greater than a half percent making the decision that much easier for employers. If it turns out an employer did unnecessary compliance work, the employer would still have made the correct decision before all of the cards had been turned over.
Finally, an employer and the government could both ignore the ACA reporting requirements. In this scenario, the employer would be rewarded by not paying the compliance fees in 2016. However, this is not a rational choice as shown in the equation above given the size of the penalty for noncompliance compared to the minuscule cost of compliance.
While the future of the ACA is far from clear, the logical choice for every employer is to submit the Forms 1094-C and 1095-C by the January 31, 2017 and March 31, 2017 deadlines. President Trump will not take office until January 20, 2017 and the Forms 1095-C for the 2016 tax year must be provided to employees on January 31, 2017. We are skeptical the government will move quickly to repeal the reporting portion of the ACA or retroactively repeal the reporting requirement which is imperative to fund the premium tax credits that have already been paid out in 2016. The ACA will surely evolve under President Trump, but noncompliance in 2016 is not worth the financial risk.
About the author – Ryan Moulder serves as General Counsel at Accord Systems, LLC and is a Partner at Health Care Attorney's 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 newly created 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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