ACA & the IRS – Pay or Play Penalties are here and most likely to stay.

The IRS is issuing ACA proposed Penalty Notices to employers. These Notices should not be ignored and, it is recommended that employers respond in a timely manner to them. If you receive one of the below Notices it is not a statement or payment demand from the IRS – It starts as an inquiry, and if the employer does not respond, it will most likely turn into a penalty that the employer may have to pay.

Of course, if the employer did not make an offer of coverage to its employees, meeting ACA requirement, there will be penalty. Most likely, the penalty amount proposed by the IRS is higher than the actual penalty amount due. It is worth the time to review your full-time employee count month by month for the calendar year, determine the penalty due, and respond to the IRS.

The 226J Notice is issued to employers when: (1) An employee goes to the Federal / State Marketplace (Exchange) and receives a subsidy (reduced monthly premium amount) for health benefits for themselves and/or family members and states that the employer did not offer them affordable healthcare coverage. Or, (2) the employer errored when completing forms 1094-C and /or 1095-C employee forms filed with the IRS.  226J Notices are being issued for Calendar Years 2015 and 2016 at this time.  

If you receive a 226J Notice, there will be a 14764 form and 14765 form included with the 226J Notice.  The 14674 form asks if the employer agrees or disagrees with the “proposed penalty amount” and allows the employer to appoint a representative to engage with the IRS to respond to the inquiry. The14765 form lists the employees by name that “allegedly” did not have an affordable offer of coverage made to them – which results in a “proposed” penalty. There are two types of penalties the (a) and the (b) penalty. Suffice it to say that for now there is a proposed penalty amount. The penalties are often due to incorrect information on the 1094-C form filed with the IRS and the actual employer penalty amount is “$0.00”.

How to respond to a 226J Notice received:

  1. If more time is needed to respond – request a 30day extension with the IRS (you can efax this to number provided on pg. 1 of the 226J Notice received).
  2. Complete the 14764 form – Example no penalty due
  3. Make corrections on the 14765 form for each employee listed on the 14765 form class code and offer of coverage information (1095-C, lines 14 and 16 codes).
  4. When sending your response to the IRS include the following:
    1. A brief explanation, stating the health plan offered met ACA requirements and was affordable.
    2. Correct employee codes for all employees listed on the 14765 Form
    3. Pages 1 and 6 of the Summary of Benefits and Coverage (SBC) for the calendar year – page 1 shows the plan coverage year and page 6 typically shows that the plan meets ACA requirements.
    4. Include waiver of coverages signed by the named employees listed on form 14765
    5. Provide information showing that the offer of coverage was affordable for each of the named employees. If the employer used Code 2F (W-2 Affordability safe harbor), include a copy of the employee’s W-2 form with the calculation validating that that the employee premium copay portion for self-only coverage is affordable. Also, include corrected copies of forms 1095-C for each of the named employees on the 14765 Form.
    6. Provide a “corrected” 1094-C. Often, the employer (or third party completing the 1094-C Form) errored when completing lines 22 & 23 on the 1094-C form, which may have resulted in the 226J notice being issued.

If the employer made an offer of credible coverage to employees and provides the above information, most likely the employer will receive a $0.00 redetermination letter form the IRS.

IRS Notice 5699 (5698 Reminder Notice)

This notice is an inquiry, if not responded to, will result in a significant penalty assessment payable to the IRS.  Do not ignore this notice. In most cases, this letter is being sent when there is no record that the employer filed a 1094-C w/1095 employee forms with the IRS for calendar year 2016 (reporting spring, 2017).

If the employer did not file for 2016, the employer needs to follow these steps; if they do, there is apossibility that they will not be assessed a late filing penalty.

  1. “Timely” Respond to the 5699 Notice (or 5698 Reminder Notice).
  2. If the employer did not do their ACA filing in 2016, CHECK BOX 3 (on the 5699) andcomplete the 2016 ACA filling (within 90 days) – if over 250 employee 1095-C forms are created, the 1094-C along with the 1095-C employee forms need to be filed electronically. If under 250 1095-C forms, the filing can be mailed to the IRS but must match the filing by mail requirement (reference IRS publication 5223).
  3. It is not necessary to mail (or provide) the 2016 forms to the employees. Some employers are providing these forms late to employees just so they are 100% compliant. The IRS is more interested in getting the 1094-C w/1095-C forms from the employer.
  4. The employer will receive a “close out letter” from the IRS – possibly saying no late filing penalty due.

Why does the IRS want to employers to (late file) their 1094-C? Here is one reason.

  1. Randomly, The IRS is reviewing all 1094-C filings (those that filed on time and those that filed late [5699 letters]) and may issue a 226J Notice for an “Estimated” Employer Shared Responsibility [ESRP] Penalty) – This is a different penalty, totally separate from the late filing penalty (5699 notices being sent).

Lastly, sometimes an employer will receive the 5699/5968 Notice and they “actually did file”. The IRS has said if the employer did file “please inform them”. Often, the employer or their third party attempted to file in 2017 for the 2016 year (or other year) and the filing was rejected – this is the same as “no filing” being recorded with the IRS. The process to refile for an employer who attempted to file their 2016, 1094-C should be easier since those records should be accessible by the employer, can be corrected and resubmitted.

While 2015-2017 6055/6056 reporting has come to a close, there’s still time to ensure compliance for the 2018 reporting year. BASIC’s ACA Elevate takes away the stress and complexity of ACA coding with assistance from BASIC’s compliance experts. Request a proposal for BASIC’s ACA Elevate today*

*Due to the impending IRS filing deadlines and the March 04, 2019 1095 furnishing deadline, BASIC reserves the right to no longer guarantee the filing or furnishing of the 1095 forms in time for clients who sign-up after Dec. 21, 2018.

Article provided by Joe Aitchison, SPHR, SHRM-SCP, CHRS

Joe is Senior VP of Business Strategy at BASIC, an HR Technology Company, providing employer solutions in the area of human resources and benefit administration. Services include payroll, unemployment, COBRA, FLEX, FMLA, and HR outsource services. In his current role, Mr. Aitchison is responsible for regulatory compliance and is BASIC’s resident expert on employment practice and benefits. He provides guidance on HR best practice to BASIC’s 15,000 clients nationally. He is a known frequent national speaker at conferences, presenting on “Employer Best Practice”, FMLA, Health Care Reform/ACA compliance, employee benefits, and employment related federal regulations and risk management.

Mr. Aitchison has obtained a lifetime certification as a Senior Professional in Human Resources and is certified by the Society of Human Resources as a Senior Certified Professional.