We’ve crossed over into the new year, and the heat is on for large employers. At organizations with 50-plus full-time equivalents, these entities have roughly 60 days to compile, review and release a year’s worth of employee, benefit and dependent data to individuals who do and don’t work for them, and do it in a way that satisfies the ACA’s and the IRS’ liking. Get it wrong and a seven-figure proposed assessment can loom large.
But just what does it mean to get ACA reporting wrong? What are the circumstances that prompt the IRS to warn employers about ACA-related penalty exposures? As employers work feverishly to get the 2019 job done on time, let’s examine a few of the common reasons why getting the “what” of reporting right is just as important as the “when.”
If you look at the way the IRS drew up its ACA Information Returns (AIR) system error code structure, it is easy to see the vast number of ways in which ACA form data can be problematic. The good news is the IRS has not been able to mechanize the full gamut of error codes. Therefore, its focus to date has been very macro. The IRS is holding employers accountable for filing Forms 1094/1095 based on their size. Additionally, the IRS expects applicable large employers (ALEs) to be ready and able to demonstrate specific compliance with the ACA’s employer shared responsibility (“pay or play”) mandate. This is especially true when the IRS suspects it awarded health insurance subsidies to individuals who work for these ALEs.
Did you or didn’t you?
One of the fundamental questions the IRS asks is posed well before it takes a look at what an employer reported for specific employees. Within Part III of Form 1094-C, the IRS asks the employer to designate, for each month in the year, if it offered minimum essential coverage to 95% or more of its full-time employees. Many employers who do not know how to answer this yes or no question, or who don’t provide accurate setup information to third-party reporters, leave this section blank. The IRS, in turn, defaults a blank response to a “no” answer. As a result, these employers are telling the IRS they knowingly did not offer coverage to the required minimum number of full-time employees – a clear red flag.
Perhaps more concerning and when viewed mechanically, the answer to this yes or no question is scientific. An employer should be able to track its compliance with this requirement by running reports that calculate to the percentage on a monthly basis. Having this information available – and reviewing it – on a monthly basis provides the employer with an opportunity to make adjustments during the year to ensure the accuracy of the yes or no answer. In our experience, most employers who receive a Letter 226-J are unable to produce this type of report and submit it as evidence that supports a formal IRS response.
Just what is an “authoritative transmittal” anyway?
Some employers are falsely interpreting this Form 1094-C designation. These employers tend to correlate the meaning to Federal Tax IDs, when the true meaning has to do with the totality of what is included in the filing. In making this error, an employer with three ALE members of its aggregated group may fill out Forms 1095-C under each member but fill out only one Form 1094-C under the Federal Tax ID it designated to be “authoritative.”
When the IRS is looking to hold ALEs accountable for the ACA reporting requirement, it conducts a comparison of employer W-2 submissions to what it has on record for the same Federal Tax ID and by way of Form 1094-C. If it cannot locate a Form 1094-C filed under that same Federal Tax ID, it will issue a notice to the employer contacts it has on file via the W-2 submission. This notice requires the employer to explain why the IRS cannot locate Forms 1094/1095 for this company. Employers who ignore these notices eventually are assessed a penalty of $520 per W-2.
One potentially related and complicating factor involves what an employer can literally see versus what was filed, especially when a third party is used to complete the IRS AIR transmittal. We have experienced situations where penalized employers can produce physical copies of Forms 1095-C for each ALE member. However, they have no way of being able to confirm the contents of the IRS AIR XML files the vendor issued on their behalf. Said another way, these employers have no way of confirming if the electronic IRS filing matched the physical forms. This is especially true when the employer changed reporting vendors in subsequent reporting years. When picking reporting services, it is important for the employer to do its homework with respect to what it can receive by way of vendor-supplied proof and support for IRS inquiries.
Do you know what time it is?
Everything about ACA reporting is historic. The information on the forms reflects past actions taken with respect to offers of coverage. Yet, we continue to come across employers who are using the most recent year’s data to make ACA full-time status determinations for that same year. In reality, this determination requires a look at data from the prior year and potentially even earlier depending on the timing of the measurement period. Similarly, we also find employers making the 50 FTE threshold ALE status determination using current year employment records when it, too, is based upon the employer’s size during the prior year.
When it comes to the employer mandate, the time to figure people matters out is not when Forms 1094-C and 1095-C are being prepared. Employers who are practicing sound compliance in this area have access to the information they need to monitor their populations on a monthly basis. Done this way, the forms merely become the bi-product of an employer’s ongoing (and scientific) efforts to ensure ACA full-time employees are accurately recognized and offered compliant coverage.
Affordability is not a guessing game
When we take on new ACA reporting clients, efforts are made to understand how the affordability of an employer’s health coverage was and is being determined. Whenever we have to define the affordability safe harbors for our new client, or whenever we are told that “our broker handled that for us,” we know that affordability was probably not given its appropriate due.
The wrong time for the affordability calculation to be put to the test is in response to an IRS notice. That’s because if affordability fails for one person called into question by the IRS, it then fails for all persons called into question. This proposition becomes more and more costly with each additional person of interest identified by the IRS. All this clearly demonstrates why affordability as one determinant of employer shared responsibility must be a deliberately managed component of an ALE’s cost-sharing strategy.
The heat is indeed on when it comes to 2019 information reporting to the IRS. Noteworthy is the fact that it likely will not let up any time soon, at least when it comes to the employer mandate. On Dec. 18, 2019, the Fifth Circuit Court of Appeals in New Orleans punted the validity of the entire ACA back to a federal district court judge who originally argued against it due to the elimination of the individual mandate. The timing of this action coupled with an impending presidential election makes it unlikely that anything significant will happen to derail the employer mandate within the next two years.
With the employer mandate firmly in place, hefty proposed penalties dropping on the regular and an indication from the IRS that it will get more particular with penalty response arguments in the future, now is the time for ALEs to get serious when it comes to ACA compliance. Treat the subject as an enterprise risk proposition and grant it the appropriate amount of independent attention. Avoid assuming and trusting (maybe even hoping) that your human resources, employee benefits and payroll staff are getting it right.
Ready? Set? Report!
For more information on this topic, or to learn how Baker Tilly Vantagen specialists can help, contact our team.
About the ACA in Action series and Baker Tilly Vantagen
ACA in Action is a series of informative articles that provide practical perspectives on current matters of Affordable Care Act (ACA) compliance. Offering these perspectives are certified ACA experts from Baker Tilly Vantagen who are well-versed in how evolving ACA concepts are uniquely affecting everyday operations within impacted organizations.
Baker Tilly Vantagen is the employee benefits administration and human resources consulting arm of Baker Tilly. We have been providing ACA compliance support since 2010, and preparing, issuing and transmitting Forms 1094/1095 on behalf of employers since 2015.
Stay tuned for part three of the four-part ACA in Action series!
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.