There is no question that the employer shared responsibility provisions under the Affordable Care Act not only are confusing, but also are resulting in some significant penalty assessments. This article is applicable to employers with 50 or more full-time equivalents.
As background, under the employer shared responsibility mandate, applicable large employers (ALE) are required to identify and offer affordable coverage to all full-time employees (those working, on average, 30 hours or more per week, or 130 hours per month) and file informational returns on Forms 1094-C and 1095-C with the Internal Revenue Service (IRS). ALEs were generally required to offer coverage beginning in 2015.
It is important to understand a few key terms—namely, ALE, full-time equivalent, controlled groups, and affiliated service groups.
For 2018, an ALE is an employer that employed 50 or more full-time equivalents during 2017. In other words, ALE status for the current year is based on employment levels in the preceding year.
A full-time equivalent for ALE purposes is based on an employee who works, on average, 120 hours per month. This definition is different from the definition that requires employers to offer coverage to those full-time employees who work 130 hours per month on average.
The Internal Revenue Code (IRC) Sections 414 (b), (c), (m), and (o) apply, as well as the ownership attribution rules under IRC 1563 for controlled groups (CG) and IRC 318 for affiliated service groups (ASG), in determining ALE status. In English, this means you may be required to aggregate two or more commonly related businesses based on ownership, entity structure, and other factors in determining whether you employ 50 or more full-time equivalents. It is common practice to overlook or misapply these rules because of their complexity in determining whether a CG or an ASG exists.
One common structure is a clinic owned by its physicians and the clinic and/or physicians having ownership in a related surgery center. Employers may erroneously conclude that the 50 or more full-time equivalents apply to each entity, not to both entities combined, if a CG or an ASG is not considered. This same analysis applies in the context of sponsoring a qualified retirement plan. The failure to reach the correct conclusion as to the existence of a CG or an ASG has broad implications to employee benefit plans, likely leading to costly corrections and compliance concerns. Thus, it is important to seek professional advice regarding this analysis when in doubt.
IRS Notices – Letter 226-J
The IRS has been actively sending notices (Letter 226-J) to ALEs to notify them that they may be liable for an Employer Shared Responsibility Payment (ESRP) related to the 2015 filings. See the attached link for an example: https://www.irs.gov/pub/notices/ltr226j.pdf.
The determination of whether an ESRP is owed is based on information filed on Forms 1094-C and 1095-C, as well as whether a full-time employee has obtained a subsidy for insurance purchased from the marketplace exchange.
If you receive one of these letters, we advise you to do the following:
- Carefully review the letter and attachments in a timely manner. The IRS will require a response within 30 days of mailing the letter. Do not ignore the notice. An extension of time may be requested if more time is necessary to adequately respond.
- Pull supporting documentation from your Form 1094-C/Form 1095-C, along with your payroll records (including hours worked per month and total hours for the year), employee waivers, premium sheets, health insurance enrollment, and offer-of-coverage records.
- Contact your service providers who prepared the forms to obtain any missing information.
- Contact your accountant or other professional advisor to review/assist in preparing an adequate response. Consider signing Form 2848 (Power of Attorney and Declaration of Representative) to allow someone to contact the IRS on your behalf. Note that the Form 2848 must state specifically the year and that it is for the Section 4980H Shared Responsibility Payment.
- Your response must be submitted by the due date noted in the correspondence and must include Form 14764 (ESRP Response) documenting your agreement or disagreement with the letter. If you disagree, indicate the necessary changes on the Form 14765 (Employee Premium Tax Credit Listing) and note the changes. Do not amend any Form 1094/1095. Consider providing an updated Form 1094-C/Form 1095-C for any changes requested.
- If you agree with the proposed ESRP liability, complete Form 14764, sign it, and include your payment with the envelope provided.
- Retain a copy of the letter and any documents you submit.
IRS Notices – Letter 5699
Recently, the IRS has been sending out another notice to certain employers (Letter 5699) inquiring about the employer’s informational reporting forms (Forms 1094-C and 1095-C) that might have been due in prior years. This letter is sent to employers that might have failed to submit their informational reports. If the IRS doesn’t have a record of the employer’s Forms 1094-C and 1095-C, and it believes the company should have submitted those reports (based on Form W-2s filed), the IRS may send this letter to you. The IRS letter identifies the year of inquiry and provides the employer with five options to respond as follows:
- Acknowledge status as an ALE for the year indicated and that you actually did file the appropriate forms (and identify the date and employer identification number [EIN] used to file).
- Acknowledge status as an ALE for the year indicated but that you didn’t file appropriately or on time for the year. You would also include in the response the appropriate forms and explain the reasons for the late filing.
- Acknowledge ALE status and promise to report within 90 days of the letter (and explain the reasons for the late filing).
- Dispute that you were not an ALE for the year in question.
- Indicate your response as “Other” and explain why you didn’t file and any actions you plan to take to fix the failure.
As a reminder, the letter warns that there are penalties for failing to file the appropriate informational returns. While the letter does not specify penalty amounts, the 2017 IRS instructions for Form 1094/Form 1095 indicate that the penalty amount for failure to file a correct information return is $260 for each return, with the total penalty for a calendar year not to exceed $3,218,500. The same penalty may also be assessed separately for failure to provide a correct payee statement.
Employers that receive IRS Letter 5699 should carefully review the letter. The first page of the letter also contains IRS contact information, and employers may wish to reach out to the IRS contact person to let them know you’ve received the letter and are working toward its resolution. The employer should check one of the five boxes in its response for further explanation and follow-up.
We strongly encourage you to seek professional assistance early (generally your accountant or attorney) in reviewing the information and preparing a response. Wipfli has experience in responding to these notices as well as preparing the Forms 1094/1095. We have provided significant value to our clients in reducing or even completely abating the penalty assessment in most cases. Because 2015 was the first year the forms were required, no one was an expert in preparing these forms, and a series of mistakes have commonly been made. This is true whether the preparation was outsourced to a third-party preparer or prepared in-house and is why it is critical that the preparer be knowledgeable and competent in preparing these forms.
For additional questions or information, please contact Tom Krieg, Bob Buss, or your Wipfli relationship executive.