By - October 12, 2018

3 Reasons Why the Risk of Receiving an ACA Penalty is Increasing

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Employers have now completed three years of ACA reporting to the IRS and to employees. And compliance-minded employers are already preparing for their tax year 2018 filing. As I mentioned in my previous blog ACA Penalties Keep Rolling In, the IRS continues to crank out ACA penalty notices for the 2015 tax year in the form of IRS Letter 226J. According to a recent update from the Treasury Inspector General for Tax Administration (TIGTA), for the 2015 tax year more than 49,000 Applicable Large Employers (ALE) are at risk of receiving penalties and IRS Letter 226J has only gone out to just over 33,000 so far. That means that roughly 16,000 more employers can expect IRS Letter 226J for 2015, right as they shift focus to ACA reporting requirements for 2018. The risk of receiving and ACA penalty is increasing and here’s why:

1. The IRS is more efficient with ACA penalty notices

Like all IRS penalty notices, IRS Letter 226J presumes that the recipient owes the associated fine and gives the recipient the option of paying the penalty or refuting it. There’s also a 30-day clock that starts ticking on the date of the letter. This adds pressure on employers to research and respond very quickly, as often a week to ten days is lost as the letter is sent and finds its way to the right person in the organization. Keep in mind that the current batch of penalty notices and fines are for tax year 2015, meaning that if you receive one of these notices you must find proof of what you reported to the IRS in March of 2016. That likely involves digging through the historical data from your payroll, benefits administration, time-tracking, and COBRA systems dating back as far as October of 2013. If you have switched any of those systems since 2013, the challenge is exponential.”

IRS Letter 226J can inform an employer of two possible ACA compliance violations:
1) Failure to offer affordable qualifying insurance to substantially all full-time employees or
2) Failure to offer affordable qualifying insurance to a full-time employee who subsequently received a subsidy on one of the state or federal health insurance exchanges.

2. More complex organizations have even more risk of ACA penalties

Because of complex employer structures, a single IRS Letter 226J can include both types of ACA penalties across multiple EINs in an employer control group. The basis of the IRS determinations, as listed in IRS Letter 226J, is the IRS cross-referencing forms 1094-C and 1095-C, as submitted by employers, with subsidy reports from the health insurance exchanges and individual’s annual tax filings.
If the employer disagrees with the IRS conclusions presented in IRS Letter 226J, each EIN or employee listed in the letter must be researched individually and supporting information pulled from the employer’s systems-of-record. Then the response to Letter 226J must be generated, with hand-written adjustments made onto a provided list of employees and codes from the IRS and returned. All this activity has to happen before the 30-day clock expires unless you request and receive an extension – another time intensive process all its own. We walk through these steps in explicit detail in our white paper: ACA PENALTIES and What You Need to Do When You Receive a Letter 226J

3. ACA penalty risk increases with 2016 tax filing

The IRS generation of Letter 226J for tax year 2015 is effectively a dress rehearsal for tax year 2016, which is the year where the full ACA requirements kicked in for employers. For example, in tax year 2015 employers got relief on the 95% threshold for offering qualifying coverage to full-time employees, only having to prove they offered to 70% of full-time employees. If 49,000 employers are getting letters for 2015 when the thresholds were low, what’s the size of the group that will get IRS Letter 226J for tax year 2016 when that threshold goes up to 95%?

Outsourcing ACA reporting helps mitigate risk

ACA reporting is already extremely complex and the complexity has not yet peaked. Most employers are not equipped to deal with this complexity. If you’ve found yourself in the midst of ACA penalty mayhem, Tango is here to help. Tango Health is a full-service ACA compliance vendor that offers our clients a completely outsourced, end-to-end ACA reporting solution.
We achieve a higher standard of accuracy by combining our ACA software and expert ACA services to turn payroll and benefits information into ACA-ready data throughout the year. Penalty, audit and subsidy notice assistance is included in our service solution so you’re ready for any ACA audits and are able to efficiently respond to ACA penalty notices or subsidy notifications. Would you like to learn more? Visit our ACA Compliance page or Contact Us for more information.
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