EXECUTIVE SUMMARY ABOUT IMMINENT IRS AFFORDABLE CARE ACT/OBAMACARE EMPLOYER PENALTY NOTICES
The IRS has recently indicated that they will be mailing out their “first ever” proposed assessment notices to employers who the IRS believes may owe “penalties” (employer shared responsibility payments) for not providing ACA compliant insurance coverage to 95% (70% for 2015) of their full-time employees and their dependents (but not spouses). The understanding among ACA experts is that the initial notices will be for year 2015, and that notices for year 2016 will be mailed sometime during 2018. Year 2015 penalties would apply only to “applicable large employers” (ALE), who are employers of all types (no exception for non-profits, churches, government entities), who during year 2014 employed a monthly average of 50 or more “full-time equivalent employees”, which is a combination of employees who worked 30+ hours per week (ACA defines “full-time” as 30 hours or more per week) plus part-time employees who worked below 30 hours per week, whose hours are totaled and converted into what the ACA calls “full-time equivalents”——Example—–2 employees working 15 hours per week equals 1 “full-time equivalent” employee.
Employers of all types and sizes should keep their eyes open to possible IRS ACA notices and should carefully review them for accurate responses. ACA experts are concerned that many, and perhaps a majority, of these “first time ever” ACA notices could be incorrect since they are computer generated based on gathering data from multiple sources into the IRS system for calculation of possible employer penalties, which the Treasury Inspector General’s audit report of April 7,2017, concluded was inefficient and inaccurate in many respects. Information for proposed assessments of employer penalties is based on pulling and integrating data from the employer-prepared ACA 1095/1094 reports prepared both by employers and insurance companies, information about individuals obtaining subsidies from the ACA “marketplaces,” which various reports indicated were not thorough in analyzing whether a person was entitled to premium subsidies, and also from individual Form 1040 tax returns which reported and calculated premium tax credit amounts as well as indicating whether a taxpayer had enrolled in ACA complaint health insurance (with zero proof required in the Form 1040 for assessment of the individual penalties)
Summary Conclusion for All Employers——Carefully review and respond to any IRS “employer penalty notice” you receive, since IF you ignore them and do not respond to them within 30 days, the proposed assessment in the IRS notice will be converted into an actual assessment to the employer. We expect that many, perhaps the majority, of these IRS notices will contain correctable errors which require detailed responses within 30 days of receipt of the notices.
WHAT WILL THE IRS NOTICES LOOK LIKE—-HOW TO RESPOND
The IRS has released an example of their “226j” letter, which is their proposed assessment to employers who they believe may owe an employer penalty for not offering ACA compliant insurance to their employees/dependents. Our understanding is that the 226j notices will include a “packet” of other forms, to include a Form 14765 which lists which employees received, correctly or incorrectly, premium tax credit and/or cost sharing reductions from the ACA marketplace, calculations by month of proposed assessments of employer penalties, response forms for employers to send back to the IRS with details to rebut the IRS calculations, so forth and so on. Employers will have 30 days in which to respond to the IRS to their 226j proposed assessments, and then the IRS will send out a “227 letter” as their response to the employer’s response. An employer can also request a “pre-assessment conference” with the IRS if they dispute the findings of the IRS in the 227 letters. It is not known how long the IRS will take to send out their responding 227 letters or how long the pre-assessment conference scheduled meetings will take——-due to the utter confusion and potential massive mistakes on this “first time ever” process, long delays should be expected from the employer’s response until any final assessment is agreed to by the employer and the IRS.HOWEVER, the employer will know, based on ACA law, where they “stand” once they have reviewed the 226j original notice and compared it to their own records and ACA law as to employer penalties———–EMPLOYERS MUST CAREFULLY REVIEW AND RESPOND TO THE IRS 226j NOTICES. Compare the IRS calculations and employees listed who received subsidies with your own 1095/1094 ACA reports for year 2015——–Advice may be needed from your benefits consultant, your ACA reporting firm, your lawyer and your CPA.
TYPES OF ACA EMPLOYER PENALTIES—WHAT THE IRS IS LOOKING FOR
The only employers who are subject to potential ACA penalties are so called “applicable large employers” (ALE’s).An ALE is an employer who employs a monthly average of 50 or more “full-time equivalent” employees, for the entire calendar year. Every employee who is hired to work at least 30 hours per week is automatically a “full-time employee”, and employees who work less than 30 hours per week have their hours worked “converted” into FTE’s—–Example——10 employees who work 15 hours each for a month total 600 hours of worked time for the month, which when divided by 120 (equivalent to a full-time employee who works 4 weeks at 30 hours per week), converts into 5 FTE’s. Adding an employers” full-time (30+ hours per week) number of employees to their converted part-time hour “equivalents” equals their FTE’s for the month. An employer could be an ALE, subject to ACA requirements as to insurance and reporting, even if they have zero full-time employees. An employer whose workforce is comprised of 100 employees, all of whom average 15 hours of work per week is an ALE with 50 FTE’s. SO “part-time hours” count to determine IF an employer is a “large employer/ALE”
An “applicable large employer”/ALE are the only employers who must abide by ACA requirements for insurance offers and ACA forms reporting——employers with less than 50 FTE’s, on average per month, are not subject to the Affordable Care Act (although, those smaller employers do need to report insurance coverages/enrollments to the IRS on “B” forms——-not “C” forms which are only required of larger employers). The responsibilities of an ALE/large employer are to “offer” “minimum essential coverage” to all “full-time” employees (part-timers/below 30 hours are not required to have insurance offers) and their dependents (except spouses), in a manner in which the offered insurance meets an ACA quality standard called “minimum value” (MV) and also is “affordable” to the employee for employee only coverage. The ACA has 2 tiers of employer penalties for non-compliance——-1. IF the employer offered “MEC” coverage to at least 95% (70% in 2015) of their “full-time employees” and dependents, they cannot be penalized with the Section 4980H(a) penalty. The “A” penalty can be assessed on all an employer’s full-time employees IF only one employee obtains subsidized coverage from the ACA marketplace/exchange. The penalty was originally $2,000 per full-time employee of the employer, less the “first 30 FT employees free” (first 80 free for 2015 only). All penalty amounts are increased each year for inflation. The “A” penalty, also known as the “sledgehammer penalty”, can be huge for employers who have many full-time employees and do not offer at least “minimum essential coverage” to their full-time employees. Some employers, with the objective of avoiding the “A” penalty, have offered so called “MEC” insurance plans to full-time employees, which do avoid the “A” penalty.However, if the MEC insurance offers do not meet higher quality standards of “minimum value” (MV) and/or are not “affordable” (as a general rule, an offer of insurance is not affordable if it costs the employee more than 9 1/2% of their wages reported in box 1 of their W-2 form (generally, gross wages less any pre-tax benefit plans). The “B” penalty would only apply specific to an employee who was offered MEC coverage which did not meet MV standards and/or was offered as “unaffordable”, and the employee went to the exchange and obtained a subsidized insurance policy, or cost savings reductions. The “B” penalty originally was $3,000 per employee BUT only applied to an employee who obtained a cost subsidy on the exchange/marketplace. The “B” penalty does not apply to all the employer’s full-time employees.
Please note that the employer penalties can only be assessed to “large employers” and only apply to “full-time employees”——no ACA requirement exists to offer insurance to employees who work below 30 hours per week.
REASONS WHY THE IRS CAN PROPOSE PENALTIES
A “large employer” could be subject to ACA employer penalties in the following cases (and, again, only pertaining to full-time/30+ hour per week employees):
- A large employer chooses to not offer any medical insurance to it’s full-time employees. This could trigger the “A” penalty, calculated as the number of FT employees less “30 free”, X $2,000——–70 FT employees less 30= 40 X $2,000 in penalty (for 2015 only, an employer can reduce their full-time employee count by 80, not the 2016 forward “30 free”;
- The employer offered medical insurance coverage to its’ full-time employees and their dependents, but the coverage did not meet “minimum value” as to quality of coverage OR was not “affordable” to the employee (generally, the employee’s cost is greater than 9 1/2% of household income, with a safe harbor for the employer of 9 1/2% of W-2 wages.This fact pattern could generate an IRS penalty of $3,000 for every employee who went to the exchange/marketplace and obtained subsidized insurance coverage since they were not offered “minimum value” coverage which was “affordable”——–Unlike the A penalty, the B penalty only applies to those specific individuals who obtained subsidies from the marketplace;
- We suspect that a common reason for an IRS 226j notice proposed assessments will be mistakes, bad data, etc——–CAREFULLY REVIEW THE NOTICE DETAILS AND ASK EXPERTS IN ACA TO HELP WITH YOUR 30 DAY RESPONSE!!
WHAT IS THE ACA CONCEPT OF EMPLOYER RESPONSIBILITY AND PENALTIES?
The primary objective of the Affordable Care Act, as signed into law in March of 2010, is to make sure that all Americans can access healthcare, regardless of financial condition, pre-existing conditions, etc. The ACA has identified that we “all” share the responsibility to provide medical care to all people, and that the financial burden of providing medical care to all falls on 3 specific “groups”——each individual is required to have “minimum essential coverage” or pay an individual penalty if they forego insurance; employers, who much of our population rely on for medical insurance, share the responsibility to either offer health insurance or pay a “penalty;” and the federal and state governments also share the responsibility for medical care via Medicare, Medicaid, or providing discounted medical insurance and/or additional medical cost sharing reductions, to individuals who fall below certain income thresholds. Higher income individuals also have increased taxes which are specifically targeted to help finance the ACA’s system of premium tax credits and medical cost sharing reductions provided to lower income individuals
The employer can satisfy their “shared responsibility” to provide medical benefits to all of us in one of 2 ways——-either offering medical insurance/medical benefits to their “full-time employees and their dependents”, OR paying a penalty for not offering insurance of a specific standard and which is affordable to it’s employees. Many ACA authors have referred to this employer decision as the “Pay or Play” option——Play the ACA system by offering insurance OR Pay a penalty to help finance medical care for it’s employees.
The Affordable Care Act exempts employers from any “shared responsibility” IF they employ less than 50 “full-time equivalents employees”. Since FTE’s include part-time equivalent hours in addition to standard full-time employees, it is very easy for a smaller business, which employs many part-timers, to calculate as a “large employer” for ACA purposes. The ACA’s intent is to exclude smaller organizations from the financial and reporting burdens of the ACA.
CAN AN EMPLOYER AVOID LARGE EMPLOYER STATUS BY SETTING UP SEPARATE LEGAL COMPANIES
The “short answer” is “no”. Separate corporations, LLC’s or other legal entities are “counted” as a single employer to determine “large employer status” IF they are owned 80% or greater by the same individual owners. We are aware of some business groups (restaurants come to mind) in which locations with a similar franchise or brand are owned 21% by “investors” who are not owners in other locations——this ownership strategy can be used to keep certain businesses separate for ACA employee counting purposes. If a restaurant/other group has a “common management company” for all locations, Section 414 of the tax code would generally combine all locations being managed by the management company as a “single employer” for ACA purposes—-potentially exposing some entities to ACA requirements who otherwise may not meet the 80% “common ownership” ACA test. Obviously, “controlled group” determinations can be quite complex and legal counsel should be contacted for advice.
WHAT ABOUT THE SCARY NON-COMPLIANCE PENALTIES FOR NOT REPORTING INFORMATION BY LARGER EMPLOYERS?
The Affordable Care Act provides for various penalties if “applicable large employers” do not submit reports to full-time employees (1095-C reports) and to the IRS on a Form 1094-C. The stipulated penalties for non-compliance can be staggering as to amounts. For years 2015 and 2016, the IRS has indicated they will not assess any of the reporting penalties to employers who make a “good faith effort” to comply with ACA reporting. A “good faith effort” generally means forms are submitted, but perhaps not correctly coded and prepared.The same penalty exemption for “good faith effort” supposedly does not apply to employers who did not file any of the “C”, large employer forms. We are familiar with organizations who do not believe they are required to submit ACA reports since their full-time employee count is below 50——-but with the addition of part-time hourly equivalents, are within the definition of ALE’s. It is totally uncertain what the IRS will do with those ALE’s who did not file the 1094/1095 reports.
WHICH EMPLOYEES GET THE ACA 1095-C IRS FORMS ANNUALLY?
A “large employer” is required to provide their “full-time employees” (not part-timers) with annual Form 1095-C forms, for any employee who was a full-time employee for any month during the year. The 1095-C forms include “indicator codes” on lines 14-16 of the forms, which indicate if the employee was full-time or part-time for every month during the year, whether they were offered insurance coverage which provided MEC and also whether the coverage met “minimum value” standards and was affordable to the employee, codes for non-assessment of penalties such as the first 90 day “waiting period” to enroll in insurance offered by the employer and also the “measurement periods” for variable hour employees (which generally are 52 weeks), so forth and so on.
A “full-time employee” is a person who is hired to work a job which requires at least 30 hours of work to fulfill it (those are “designated” full-time employees) AND also a part-time/variable hour/seasonal hour employee who is not hired to work a steady 30+ hour work week BUT who over a 52 week period of time, when “looked back” at hours, actually did work at least 30 hours per week on average during the 52 week period. Those part-time/variable hour employees who do in fact work at least 1,560 hours over a 52 week period (52 weeks X 30 hours= 1,560 hours) are classified as a “full-time employee” immediately after they have met the 52 week “lookback” measurement period. During their 52 week measurement/testing period, they are not full-time employees and are instead coded as exempt from penalties since they are in their “initial or subsequent standard measurement period”——–So no insurance offers are required for variable hour or seasonal employees until they have worked at least 1,560 hours over the employer’s measurement period (NOTE—an employer can use a lesser measurement period, but 52 weeks is generally considered “best practices” for the employer to adopt)
TRACKING YOUR EMPLOYEE HOURS FOR ACA REPORTING
Here are the vitally important records which an employer must keep to properly track, manage and report their ACA profiles and annual reports:
- When you hire a new employee—-did you hire them to work at least 30 hours per week?—-If so, enter them as “full-time” in your payroll/ACA system—-IF they are hired to work less than 30 hours per week, OR they are hired to work varying hours or to work seasonally, enter them as “part-time” in your system AND then track their hours worked/paidto determine if they later become a “full-time employee”;
- Make sure that you enter hire dates and termination dates into your payroll/ACA system——these are needed since the ACA penalties and exposure is technically calculated on a monthly basis during the year;
- If you choose to offer insurance, make sure your system alerts you to enroll new employees within 90 days of hire.Also, make sure you track your part-timer hours to determine IF they are trending towards a 52-week average of 30 hours plus, which converts them to full-time status—–and qualifies them for insurance offered to full-time employees.
The Affordable Care Act is very complex, defines “full-time” as working 30 hours or more per week, and imposes penalties on “large employers” (many of whom are not large as compared to corporate America) who either do not offer ACA compliant insurance and/or does not submit detailed annual ACA reports to full-time employees and the IRS. The potential penalties for non-compliance and the Section 4980H “A” and “B” penalties could be so large that some ACA authors have pondered what the federal government will do if their assessment of ACA penalties is so substantial as to put the employer out of business—–resulting in lost jobs!! THE PRIMARY CONCLUSION IS TO SEEK PROFESSIONAL ADVICE AS TO YOUR STATUS PER THE ACA, AND DEVELOP STRATEGIES TO MINIMIZE THE FINANCIAL IMPACT AND ALSO TO TRACK AND REPORT TO EMPLOYEES AND THE IRS.
AccuPay is here to provide our “large employer” clients with annual reporting and also to help our clients understand the ACA law as it applies to each employer’s unique fact pattern. We generally help our clients with ACA concepts/designs in combination with the employer’s other advisors, to include legal consul, benefits consultants/insurance brokers, and CPA’s. Questions about ACA should be emailed to “email@example.com” or call your processor for help/transfer to one of AccuPay’s ACA consultants.PayDay is an email communication of payroll news, legal updates and tax considerations intended to inform clients and colleagues of AccuPay about current payroll issues and planning techniques. You should consult with your CPA or tax advisor before implementing any ideas, comments or planning techniques.