What You Need to Know About IRS ACA Penalties

The history of the Affordable Care Act (ACA) and ACA Penalties

The ACA became law in 2010. After a short delay, the Employer Shared Responsibility Provisions (ESRP) took effect in 2015. The Employer Mandate is another name for the ESRP. At first it looked as if the IRS may not enforce the tax and other penalties outlined by the ACA Employer Mandate, but now it’s clear that ACA penalties are a reality.
ACA Penalties Timeline

What are ACA Employer Shared Responsibility Provisions (ESRP)?

The ACA’s ESRP require Applicable Large Employers (ALEs) to offer health insurance that:

  • Is considered  affordable coverage. This means that the health insurance cannot cost more than approximately 10% of a household’s income. The exact percentage changes with inflation.
  • Meets the minimum essential coverage (MEC) requirements for the types of procedures and services that are covered.
  • Provides “minimum value” to full-time employees and their dependents. This means the plan must cover at least 60% of the total allowed cost of benefits that are incurred under the plan.

ALEs are also required to file Form 1095 and Form 1094 with the IRS on a yearly basis. These are the forms that document ACA compliance.

When employers don’t provide affordable healthcare with MEC, or they don’t file 1094 or 1095 forms, they would owe an ACA tax penalty payment to the IRS. 

What are ACA penalties?

There are four main categories of ACA penalties. Employers have already started to receive notices for the first two types of penalties and the letters keep coming. The U.S. Treasury Inspector General for Tax Administration (TIGTA) has reported that  49,259 companies are at risk of penalties.  Also, by March 2018 over 33,000 letters were sent with $4.4 billion in ACA tax assessments.  That means the remaining 19,000 Letter 226J could still be coming.  

ACA Penalty 1: IRS Letter 226J—4980H A Penalties

In fall of 2017, the first ACA penalty notices for tax year 2015 came in the form of IRS Letter 226J. These penalty notices were related to section 4980H(a) of the ACA code, “A Penalties.” ACA A Penalties are technically tax assessments meant to recover the cost of subsidies for individuals. These penalties apply in the case where an employer fails to offer affordable, qualifying coverage to a sufficient number of full-time employees. Employers started receiving ACA A Penalty letters in the fall of 2017, roughly 18 months after submitting their ACA reporting for tax year 2015. ACA A Penalties are levied against employers based on the size of their full-time employee population.

Not all employers that violated the ESRP received these penalties. For the 2015 tax year, ACA A Penalty letters were sent to a subset of large employers based on a sampling approach. The 4980H A Penalties were assessed for:

  • Employers that self-reported that they failed to meet the 70% threshold for offering Minimum Essential Coverage (MEC) to their full-time employees in one or more months of 2015.
  • Employers that have 50 or more full-time employees (ALE) but didn’t file form 1094 with the IRS.
Example of ACA IRS Penalty Letter 226J
Example IRS Letter 226J

ACA Penalty 2: IRS Letter 226J—4980H B Penalties

On April 26, 2018, the IRS started sending out Letter 226J for 2015 for the class of ACA penalties related to section 4980H(b) of the ACA code, “B Penalties”. ACA B Penalties are technically tax assessments meant to recover the cost of ACA subsidies for individuals. These ACA penalties apply to employers that 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 an ACA B Penalty up to $3,120 per tax year.

A random sampling is not being used for this penalty. The IRS is putting the burden of proof on the employer. In order to determine that an organization is in violation of Section 4980H(b), the IRS must cross-reference data from these three sources.

  • The employer’s IRS filing. The employer self-attests to the IRS whether they followed the ACA regulation, via their annual 1094-C and 1095-C filing. This filing shows whether each employee SSN was a full-time employee and whether the employer offered them affordable qualifying coverage for each month of the tax year.
  • The 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.

ACA Penalty 3: 6055 Penalty

Section 6055 requires ALEs to use form 1094-C to show that insurance was offered to full-time employees. Employers are open to penalties as a result of not following this reporting requirement.

ACA Penalty 4: 6056 Penalty

Section 6056 of the ACA outlines information reporting requirements. ALEs must file form 1095-C for all covered individuals enrolled in a self-insured plan. The insurer will provide the IRS a 1095-B form. Consequently, failure to report can result in a penalty.

Reviewing ACA Good Faith Effort

ACA Good Faith Effort is gone for 2018 IRS Filing

Sections 6055 and 6056 of the ACA outline information reporting requirements.  Each ALE is subject to a requirement to report coverage information about all full-time employees. And more importantly, the employer must report this to both the employee and the IRS. Failure to meet these reporting requirements exposes the employer to a penalty. To date, the IRS hasn’t started to send 6055/6056 penalty notices. However, the IRS has sent inquiries to employers who have not submitted information reporting packages. 

This delay in sending ACA penalty letters is likely because of the “good faith effort” relief that was available as this requirement was phased in. Previously, the “good faith effort” gave employers some flexibility if they completed the forms inaccurately or not at all. However, the “good faith effort” relief for ACA reporting no longer applies starting with the 2018 tax filing. We may start to see 6055 and 6056 ACA penalty notices.

How to be prepared for IRS ACA penalties

Since you will have less than 30 days to respond to penalties, being organized and having a plan in place just in case you receive an ACA penalty notice is important.

Develop internal process to manage ACA penalties

This is especially important if you have multiple EINs and locations. Make sure everyone knows what the letters look like, who to forward them to, and how to respond. Your organization will end up paying more if any of the IRS notices are lost.

Use standalone ACA software for full audit trail

If you disagree with an ACA penalty, you may need to analyze data from several years ago. With a standalone ACA vendor, you should be able to access your historical ACA data regardless of which HRIS/payroll system you use. And the easier it is to investigate data discrepancies, the more time you save. Standalone ACA solutions are focused on getting your data ACA-ready.  They aggregate data from your different sources and fix any issues along the way. 

How to respond to IRS ACA penalties

If you have a full-service ACA vendor, they will do the heavy lifting for you and just give you updates along the way.  But if you need to respond to the IRS yourself, being prepared is even more essential. You have 30 days from the date on the letter to respond to Letter 226J unless you ask for an extension. 

First, you should read Letter 226J in detail and determine if there is a data error. If there is an error, you would dispute the ESRP by filing out Form 14765 with supporting documentation showing how much ESRP you believe your organization truly owes. You can see our complete white paper and checklist of how to respond to Letter 226J here: ACA Penalties and What You Need to Do When You Receive a Letter 226J.

Checklist for responding to IRS penalties
Checklist to respond to IRS Letter 226J