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2019 year-end tax letter: Affordable Care Act update

Authored by Michelle Hobbs and Eric Pochas

The most significant change to the Affordable Care Act (ACA) for 2019 is the repeal of the individual mandate. Beginning this year, individual taxpayers are no longer required to carry health insurance for themselves or their dependents. The associated penalty reduced to zero this past January under the Tax Cuts and Jobs Act. Thus, individual taxpayers no longer have to disclose whether they carry insurance coverage or compute any penalties for a failure to do so.

With the individual mandate repealed at the federal level, states are now looking into assessing a similar type of penalty as a means toward resurrecting the role coverage plays in controlling healthcare costs. California, Vermont, Massachusetts, New Jersey and the District of Columbia have each implemented a penalty assessed on taxpayers that do not meet the respective state requirements to carry health insurance. While penalties in California and Vermont do not go into effect until 2020, the other states’ penalty laws were effective for 2019 (Massachusetts’ law has actually been on the books since 2006 but penalties were not assessed if taxpayers paid the federal individual mandate penalty). Connecticut, Hawaii, Maryland, Minnesota, Oregon, Rhode Island and Washington are all considering enactment of their own versions of the individual mandate.

While the federal individual mandate is no more, the employer shared responsibility (“pay or play”) mandate still requires applicable large employers (ALEs) to offer health insurance to full-time employees. The IRS is actively proposing employer shared responsibility payments (ESRPs) whenever it suspects an ALE may not have complied with this coverage mandate. A timely, well-documented response is the best way to reduce or even eliminate a proposed ESRP. ALEs that do not offer qualified health coverage to substantially all full-time (FT) or full-time equivalent (FTE) employees may be liable for ESRP penalties.

Key takeaway: While the ACA individual mandate is no more thanks to TCJA, other components of the 2010 law are still alive and well.

As background, an ALE is an employer with at least 50 FT or FTE employees. An ESRP is owed when:

  1. an ALE fails to offer minimum essential coverage to substantially all (95% or more) of its FT and FTE employees (as well as dependents) and at least one FT or FTE employee is offered a premium tax credit; or
  2. an ALE offers minimum essential coverage to substantially all FT and FTE employees (as well as dependents) but at least one FT or FTE employee was allowed a premium tax credit because the coverage offered was not affordable, did not provide minimum value or the individual was not offered coverage.

FT or FTE employees are those who work at least 30 hours per week or 130 hours in a month. ACA coverage is deemed affordable if the employer’s least expensive self-only plan costs less than 9.86% of the employee’s annual household income (based on the federal poverty level). This percentage drops to 9.78% for 2020 coverage. The ESRP penalties for 2019 range between $2,500 and $3,750 per FT or FTE employee depending on the ACA provisions in violation.

All of this coverage information must be provided to employees and to the IRS. The 2019 reporting is due to be issued to employees by March 2, 2020 (for Form 1095-C). The IRS requires these forms to be submitted to it on or before March 31, 2020, if electronically filed (required for 250 or more forms) or Feb. 28, 2020, if paper forms are filed. Requisite filings include:

  • Form 1094-B, Transmittal of Health Coverage Information Returns: includes the filers name, address, employer identification number, contact information and the total number of Forms 1095-B being transmitted to the IRS
  • Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns: includes the filers name, address, employer identification number, contact information and the total number of Forms 1095-C being transmitted to the IRS
  • Form 1095-A, Health Insurance Marketplace Statement: filed by health insurance marketplaces on individuals enrolled in a qualified health plan through government exchanges
  • Form 1095-B, Health Coverage: filed by health insurance issuers and carriers, this form discloses those individuals covered by minimum essential coverage
  • Form 1095-C, Employer-Provided Health Insurance Offer and Coverage: filed by ALEs to verify employer-sponsored health coverage, disclose those individuals covered by minimum essential coverage and used to determine in conjunction with the 1094-C to determine whether the ALE owes an ESRP

In conjunction with the federal elimination of the individual mandate, the IRS issued transition relief, in early December, for employers to provide copies of these forms to employees. This 2019 tax year relief provides that Form 1095-B filers will not be assessed penalties for failing to furnish these forms to covered individuals if two requirements are met:

  1. The coverage provider must post a notice on its website stating that an individual’s B Form is available and can be requested at any time. This notice must include an email address and physical address where the request can be sent and a phone number where individuals can get additional information.
  2. The coverage provider must provide any requested form within 30 days of the request.

Similarly, self-insured employers subject to the ACA employer mandate who also satisfy these same two requirements do not have to issue a copy of Form 1095-C to anyone who was not considered an ACA-eligible full-time employee for at least a month in 2019.  

To further complicate matters, the IRS has been active in issuing notices and assessing penalties on those employers that filed incorrect or inaccurate information or failed to file the required forms altogether. Currently assessing penalties for the 2017 reporting year, the IRS commonly issues the following types of notifications to taxpayers:

  • Letter 226-J, generally the initial letter issued to ALEs that proposes ESRPs for employers who may have failed to provide offers of insurance to at least 95% of FT or FTE employees (as well as their dependents)
  • Letters 5698 and 5699, typically the precursor to assessing an ACA penalty related to not complying with the reporting requirement; these notices request information from the employer to confirm its name, employer identification number and address as well as information about how and when it filed its ACA forms. penalties are subsequently assessed using Form W-2 counts when these letters go without a timely response
  • Letter 5005-A, sent when an ALE fails to annually file Forms 1094-C and 1095-C with employees and the IRS
  • Letter 972CG, sent to employers that filed ACA forms after the published deadlines as well as those who filed these forms in the wrong format (e.g., via paper when the volume of forms required electronic submission)

Employers generally have 30 days to respond to these letters.

On a broader ACA scale, there is a case coming out of federal court in Texas (along with attorneys general from approximately 20 other states) that aims to strike down the remaining parts of the ACA as unconstitutional. Currently before the Fifth Circuit Court of Appeals, the case argues that without the individual mandate tax, the entire ACA is no longer constitutional. The federal judge in Texas also ruled the individual mandate is integral to the ACA and cannot be considered separately from the rest of the law. In other words, without the taxing authority of the individual mandate, the employer requirement to offer health coverage to employees cannot stand on its own. Furthermore, other elements of the ACA, including required essential health benefit offerings, limits on cost-sharing arrangements and elimination of coverage limits cannot be severed from the individual mandate to carry health coverage. As a result, the case argues the entire ACA is unconstitutional. Expect this case to be appealed to the U.S. Supreme Court, which has twice upheld the constitutionality of the ACA.

Finally, delayed once again is the so-called “Cadillac” tax. This feature of the ACA applies a 40% excise tax on high-value healthcare plans. Beginning in 2022, this excise tax will kick in when the cost of coverage exceeds $10,200 for individual coverage or $27,500 for family coverage. These limits are set against the Consumer Price Index and therefore may increase due to inflation. In terms of who pays the tax, the employer is responsible for paying it on self-funded plans while insurance carriers pay it on fully insured plans. Regardless of who pays the tax, plan participants will likely feel its effects by way of increased costs.

View more insights in the 2019 year-end tax planning letter >

Download the 2019 year-end tax planning letter >

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The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.

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