Top 9 Reasons Your Organization Might Receive an ACA Penalty
As employers enter their fourth year issuing 1095-C forms to employees and submitting 1094-C and 1095-C forms to the Internal Revenue Service (IRS), the Affordable Care Act (ACA) continues to pose significant financial risk to employers. According to the Treasury Inspector General for Tax Administration (TIGTA), the IRS issued over 33,000 penalty letters to employers this year for the 2015 tax year alone, assessing over $4 billion in taxes for non-compliance.
Knowing your risk for these penalties as an employer is more than simply calculating missed offers of coverage. Employers must understand the inherent risks in their organization based on how they are structured, the nature of their businesses, and the approach taken toward ACA compliance.
What’s at risk?
There are two classes of ACA penalties that employers must worry about:
- IRS Section 4980H(a) penalties (ACA A Penalties) are the penalties for failing to offer affordable, qualifying health coverage to at least 95% of full-time employees. A-Penalties are calculated based on the entire full-time population of employees and apply for each month that the employer is in violation of the ACA’s Employer Mandate. A-Penalties are rare, but very large when they apply.
- IRS Section 4980H(b) penalties (ACA B Penalties) are penalties for each full-time employee not offered affordable, qualifying health coverage and subsequently receiving a subsidy from a public health exchange. ACA B Penalties are calculated for each affected individual and apply for each month the employer is in violation of the ACA’s Employer Mandate. ACA B Penalties are more common and will be hundreds or thousands of dollars for each affected employee.
Which organizations are at risk?
Any large organization that doesn’t comply with the ACA is subject to a penalty, but there are two classes of risk factors that generally determine an employer’s ACA penalty risk: organizational risk factors and ACA compliance risk factors.
- Organizational risk factors relate to the size and characteristics of an employer and directly affect the complexity of ACA calculations and potential magnitude of possible ACA A Penalties and B-Penalties.
- ACA Compliance risk factors are based on how an employer manages ACA compliance and drive how likely an employer is to be surprised by a penalty notice.
Organizational risk factors
1. Number of employees
The ACA’s requirements don’t apply until an employer qualifies as an Applicable Large Employer (ALE), which generally means having 50 full-time equivalent (FTE) employees. If an employer is an ALE the size of any A-Penalty scales directly with the number of FTEs. The more employees an organization has, the potential penalty rises higher. Conversely, ACA B Penalty exposure scales directly with the number of part-time employees who are not offered health coverage.
2. Organizational activities
Certain industries are more likely to receive penalty notices based on their employee population, such as education, healthcare, government, retail, restaurant/hospitality, and manufacturing. These organizations usually have more than 5% of their employees who are hired as variable hour workers or seasonal, whose hours of service must be carefully watched for compliance or be at risk for the ACA B Penalty. Additionally, any employer—large or small—who merges or acquires employees as a course of their business absorb risk through legacy activity of the company they acquire. The additional risk is true as well for organizations that have seasonal employees. The organization must track hours closely and follow the definition of seasonal to ensure they are following the ACA.
3. Mergers and acquisitions
Mergers and acquisitions come with varying ACA liabilities depending on the nature of the target organization and type of transaction. For example, stock acquisitions transfer trailing ACA liability to the acquiring organization whereas asset acquisitions trigger new hire requirements under the ACA. The company that you’re acquiring or merging with could be measuring eligibility differently or have different data sources, so the complexity can be exponential.
4. Complex organizational structure
Organizations with multiple EINs and/or shared ownership have an additional burden. They must reference each other accurately in Form 1094 filings and must allocate ACA relief items appropriately across the various ALEs.
5. Unions and multi-employer trusts
Employers who have union employees or employees whose health coverage is provided by multi-employer trusts must meet several good faith thresholds per IRS guidance.
ACA compliance risk factors
6. Lack of supporting ACA data
Some employers know that their policies related to offering health insurance are more conservative than the ACA’s requirements, so they assume that they are making the correct offers of coverage without the supporting data required by the ACA. The complexity of the ACA’s requirements along with the law’s clear guidance that employers must be able to document their health benefits decision under the ACA make this a potential minefield for employers who just assume they are doing the right thing. The lack of supporting ACA data could be related to:
- Lookback measurement periods
- Limited non-assessment periods
- Breaks in service
- Not combining COBRA and historical data
The picture is incomplete if you are not capturing all the data you need for accurate ACA reporting.
7. ACA compliance tools
Every large employer should be managing ACA with a tool today, but not all tools are created equal. Using built-in ACA functionality of a company’s primary HRIS or payroll software incurs greater risk because these tools have minimal functionality and do not analyze the intent of the data or understand the company’s ACA strategy. They perform simple calculations based on data and rarely include the features necessary for monitoring risk or even completing required ACA compliance such as measuring and reporting on all current and former employees, or the paper trail needed when responding to IRS inquiries.
A standalone ACA software offers purpose-built functionality and a wider tool-set for complying with the law. Additionally, employers regularly switch HRIS and payroll providers but do not bring in legacy data, much of which is still necessary in maintaining the measured ACA employment status of active employees.
The best practice for employers is to have a dedicated in-house ACA resource and a third-party vendor that guides them, stays up-to-date with the ever-changing regulations, and assists in penalty notice responses. This helps ensure employers only pay the penalties they truly deserve, while backing up their responses with supporting documentation.
8. ACA basics: tracking full time offers
The employer mandate didn’t change the hiring behavior of large employers: employees regularly switch from full time to part time, hiring of variable hour employees continues, universities staff with adjunct professors and student works, and employees still go on leave. What continues to be at issue is whether any of the above enter a stability period as a full time employee adds penalty risk if offers of coverage aren’t maintained and monitored.
9. Measurement period practice
While most employers use the look back measurement period in theory, the greatest risk is failing to respect previous stability periods when employees are rehired, which can be common in certain industries such as construction, manufacturing, and healthcare. It’s more common in healthcare for employees to work in multiple hospitals within the same control group, sometimes being double-employed but tracked in separate hospital payroll systems. If the data is never combined and analyzed, the risk of not aggregating all necessary hours or monitoring against the employee’s combined stability period means financial penalties with inaccurate offers or incorrect 1095-C forms.
We run across employers who don’t measure at all – and simply determine the ACA employment status of an employee based on their scheduled hours. This “no measurement period” approach is dangerous and a ripe opportunity for the IRS to easily discover during an audit.
Check your ACA penalty risk index
Are you managing ACA compliance in the most comprehensive and accurate way? Be aware of the organizational risks you can’t change and the ACA compliance risk factors you can change. Then, the next step is developing an action plan to address those compliance risk factors. And if you can’t make all changes at once, look at the change that can have a bigger impact on mitigating your ACA penalty risks—switching to a specialized ACA compliance vendor like Tango Health. Tango takes a comprehensive approach to ACA compliance. We will help aggregate all the data you need for accurate reporting, implement the look-back period for more accurate measurement, and accurately track your employees with our robust software.
Learn more about the Tango ACA Compliance & Reporting Solution or see my other blogs 3 Reasons Why the Risk of Receiving an ACA Penalty is Increasing.
Categorized in: ACA