Five Things to Know about ACA Penalty Letters
The Internal Revenue Service (IRS) has begun issuing penalty letters (Letter 226-J) to employers who are failing to comply with the Affordable Care Act’s employer shared responsibility requirement (“ESRR”). Under the ESRR, if an employer does not provide affordable, minimum-value coverage to its full-time employees (FTEs), and at least one employee qualifies for premium assistance, that employer can be assessed with up to two different penalties.
There is some question as to whether the IRS can legally assess penalties for 2015. The ACA statute and implementing regulations state that an ACA Exchange must send a certification and notification to an employer as a precondition to the IRS assessing employer mandate penalties; these notifications were not sent. In the meantime, what should you know about these ACA penalty letters? Here are five points to keep in mind:
1.The “A” penalty (“no coverage” excise tax penalty)
The first penalty is the “A” penalty, which applies if the applicable large employer (50+ FTEs) fails to offer minimum essential health care coverage to at least 70 percent of its FTEs (in 2015) working 30 or more hours per week, and at least one employee qualifies for a premium tax credit. The “A” penalty is the most serious because it applies to the entire employee population. For example, with a penalty of $2,080 per FTE (minus the first 30), a 1,000-employee company that only offers coverage to 699 employees (just under the 70 percent threshold) would have to pay 2 million – a noticeable hit to the bottom line!
2.The “B” penalty (“inadequate or unaffordable” excise tax penalty)
The second penalty is the “B” penalty, which applies if the employer offers minimum essential coverage, but it either does not meet the minimum value standard or the coverage is unaffordable, and at least one employee qualifies for a premium tax credit. Coverage is affordable only if an employee’s share of the premium for employer-provided coverage would cost the employee 9.66 percent or less of that employee’s annual household income. This $3,020 penalty applies only to the employees who received a premium tax credit and whose offer of coverage from the employer is not affordable.
3.Many employers could be caught off-guard
Many employers were under the impression that the current administration was not going to enforce the employer mandate and were taken aback to find the IRS intended otherwise. And, due to extensive administrative delays, the agency is just starting to issue letters for paperwork submitted for the 2015 tax year—when the ESRR were still in their infancy.
4.Responding immediately is the best course of action
Employers who receive the letters must respond to the IRS within the timeline specified (usually 30 days) either affirming that it agrees that the penalty is due or denying it. This response should be filed through a Form 14764, to which the IRS will send acknowledgement of the response by sending Form 227 if the employer disagrees with the proposed payment amount. By responding immediately and correcting the information the employer submitted on their 1094-C and 1095-C, employers have an opportunity to object to the penalty and explain the situation, which could lead to a reduced penalty if the employer can prove the IRS was incorrect in its calculations.
5.Make sure your 2015 coverage documents are available for your team
If you receive a letter, it’s important for your team to have ready access to your 2015 offers of coverage as well as 2015 IRC section 6056 reporting documentation, accomplished on the Form 1095-C series. Remember, the vast majority of assessment letters will be triggered by ACA reporting errors. A careful review of your historical documentation—in conjunction with your tax and legal advisor–will facilitate your response and identify potential problem areas in filings in later tax years. With this information available, you’ll be better prepared to respond to any future letters from the IRS.