ACA Penalties Keep Rolling In—The IRS Means Business
Since November 2016 there have been two intensive efforts to repeal the ACA resulting in exactly zero changes to the ACA’s Employer Mandate, as discussed in our recent post: Still Think the ACA Was Repealed in 2017? To underscore the reality that the ACA is here to stay for employers, HR and compliance teams across the country are now trying to make sense of letters from the Internal Revenue Service (IRS) demanding payment for ACA penalties related to the ACA’s Employer Mandate.
Fall 2017: ACA A-Penalties
The first ACA penalty notices for tax year 2015 came in the form of IRS Letter 226J. This wave of penalty notices was related to section 4980H(a) of the ACA code. Let’s call them “A-Penalties.” Employers started receiving A-Penalty letters in the fall of 2017, roughly 18 months after submitting their ACA compliance filings for tax year 2015.
Employers receiving A-Penalty letters for 2015 fell into one of two categories:
1) The employer self-reported that in one or more months of 2015 they failed to meet the 70% threshold for offering Minimum Essential Coverage (MEC) to their full-time employees
2) The employer appeared to the IRS to be an Applicable Large Employer (ALE), meaning they had more than 100 full-time employees in 2015, and failed to file Form 1094 (the form that documents ACA compliance) with the IRS.
A-Penalties are macro-level ACA penalties levied against employers based on the size of their full-time employee population. It was logical that the A-Penalties showed up first, because the IRS didn’t need any additional infrastructure to identify potential violations.
Internal audit documents available from the Treasury Inspector General for Tax Administration (TIGTA) indicate that A-Penalty letters for tax year 2015 were sent to a subset of large employers based on a sampling approach used by traditional audit activity, meaning that it is unlikely that all employers who were in violation of section 4980H(a) of the ACA code for tax year 2015 received penalty notices.
April 2018: ACA B-Penalties
On April 26th of this year the other shoe dropped. The IRS started sending out Letter 226J for 2015 for the class of ACA penalties related to section 4980H(b) of the ACA code. Let’s call these the ACA “B-Penalties.” B-Penalties apply to employers in each case where an employer failed to offer affordable qualifying coverage to a full-time employee during a tax year and that employee subsequently went to the public exchange and received a subsidy to buy insurance. Each affected employee exposes employers to a B-Penalty up to $3,120 per tax year.
The burden of proof
Arrival of the B-Penalties is a huge deal for employers because it means the IRS’ ACA penalty engine is now firing on all cylinders. To target employers owing B-Penalties, the IRS must have high confidence in their ability to cross-reference data from three sources:
- The employer: Self-attests to the IRS, via their annual 1094-C filing, whether each employee SSN was a full-time employee and whether they offered affordable qualifying coverage for each month of the tax year.
- The employee: Each employee’s 1040 shows their income, which validates whether the exchange subsidy was valid.
- The public health exchange: Reports subsidies by SSN for each month to the IRS.
There is no random audit involved here. Arrival of IRS Letter 226J identifying B-Penalties means the IRS has finished tying those three data sources together in their software system to make this a standard check for all employers and employees. From here forward, the IRS will now match up every single person who received an exchange subsidy to buy insurance with their employer(s) for that tax year to see if they need to come after the employer for the B-Penalty to reimburse the government for the subsidy the employee received. This is the IRS we are taking about, which means… The burden of proof will squarely be on the employer.
Once the IRS finishes with the penalties for 2015, it’s safe to assume they will move on to 2016, and then 2017. It’s also likely that the IRS will continue to improve their processes and start leveraging A-Penalties to all of those in violation instead of a random sample.
Need help with ACA compliance?
No one can stand between you and the IRS on this issue, as your responses to IRS Letter 226J (IRS Forms 14764 and 14765) must be signed by a company representative. However, your full-service ACA compliance provider should be all over this… predicting A-Penalty notices before you receive them and helping you respond to B-Penalty notices quickly when you get them. Your historical ACA compliance information should be readily available in their system to quickly verify or refute the penalty notice based on data that is up to 24 months old.
At Tango Health, we do everything we can to ease your ACA compliance burden. We provide monthly compliance calculations and reviews, expedited responses to IRS Letter 226J and a designated Client Manager to help throughout the year. If your ACA compliance provider is falling short, we stand ready to help. Learn more about our Tango ACA Compliance & Reporting Solution.
Categorized in: ACA