ACA Update: The IRS Issues Guidance on Enforcement of ACA Penalties

Last year the Department of Health and Human Services (HHS) and the IRS took the first step in enforcing the Employer Shared Responsibility Penalty (ESRP) when the Health Insurance Marketplace issued letters to employers informing them of employees who received subsidies on the Marketplace. HHS then reported this information, and any subsequent appeals, to the IRS for possible penalty enforcement. The question remained: What would happen next?

Next Step: Possible IRS Action

More than a year later, we are beginning to learn about the next step. We’ve known that the purpose of employers filing Forms 1094-C and 1095-C was to aid in enforcement of potential penalties, but until recently, we did not know what this would look like in practice.

Last week the IRS released sample Letter 226J, which informs an employer subject to the mandate (an Applicable Large Employer or “ALE”) that the IRS believes a penalty is due for the 2015 calendar year. If you are an ALE, your company may be subject to the penalty if it had at least one full-time employee receive a premium tax credit (subsidy) on the federal or state Health Insurance Marketplace because you did not offer the employee affordable, minimum essential health coverage that provided minimum value.

Letter 226J will include information and attachments, such as:

  • An explanation of the shared responsibility penalty
  • A table showing the proposed penalty, broken down by month
  • Form 14765 that lists each full-time employee for whom you filed a 1095-C who received a subsidy for at least one month. This form will include the codes you provided on Lines 14 and 16 of Form 1095-C
  • A description of the appeals and payment processes
  • The day by which you must respond to the letter (typically 30 days)

As a reminder, there were several types of transition relief available for 2015 that may help you avoid a penalty. You will want to review these if you receive a letter:

  • Employers with 50-99 full-time equivalent employees were required to file Forms 1094-C and 1095-C but were not subject to penalties
  • Non-calendar year plans were not required to comply until the first month of the plan’s 2015 plan year
  • Coverage only had to be offered to 70% of full-time employees
  • If you were assessed a penalty for not offering coverage to full-time employees, you were given a credit of 80 employees from the penalty calculation

What Do I Do If We Receive a Letter?

If you receive a letter, you will want to contact the vendor  you used to help file Forms 1094-C and 1095-C. These vendors may have resources available to help you respond to the letter and can help you determine whether the penalty information is accurate.

You will want to research each individual employee listed on the form to see if the penalty is accurate. If you do not agree with the penalty, you do have a chance to appeal. You will have a chance to document why you don’t believe the penalty is accurate, submit revisions to Forms 1094-C and 1095-C codes, and revise the employee list on Form 14765 if necessary.

If after reviewing the forms you agree that the penalty is correct, you will still need to respond to the letter. Your response should include payment for your penalty or information regarding payment plan options.

Going Forward

Alert your finance and HR teams that Letter226J may be arriving. These letters are set to arrive in late 2017 (which is now) so you may receive one soon. Because you only have 30 days to respond, it is important to anticipate and prepare for this possibility as we enter the holiday season.

This letter is a strong signal that the IRS is finally in position to enforce penalties under the Employer Shared Responsibility Provisions. Therefore, it is imperative that you continue to exercise diligence in filing your upcoming Forms 1094-C and 1095-C.

If you have questions, please contact Compliance Manager Kelly Eckman or any member of your FirstPerson advisory team.