The IRS recently updated long-unchanged guidance regarding its enforcement of the Affordable Care Act’s (“ACA’s”) employer shared responsibility provisions (commonly called the “employer mandate”), which generally require large employers to offer health care coverage to their full-time employees or face tax penalties. According to the new guidance, the IRS plans to notify employers in late 2017 of their potential liability with respect to the 2015 calendar year, which means employers may receive some not-so-merry IRS greeting cards just as this year’s holiday season gets underway.
As a reminder, the potential employer mandate penalties for calendar year 2015 are as follows:
$2,080 for every full-time employee (for employers who did not offer coverage to a sufficient percentage of its full-time employees); or
$3,120 for full-time employees who received an exchange subsidy (for employers who offered coverage to full-time employees, but the coverage was either unaffordable or did not provide minimum value and at least one full-time employee received an exchange subsidy).
These are the annual penalties; however, the penalties are actually assessed on a monthly basis for penalties of $173.33 and $260 per month, respectively.
The IRS will contact employers using the new Letter 226J (available here). The IRS’s initial determination of whether an employer may be liable for an employer shared responsibility payment and the amount of the potential payment is based on information reported to the IRS on 2015 Forms 1094-C and 1095-C and information about full-time employees of the employer that received a premium tax credit for coverage on an exchange. The IRS will send an employer Letter 226J if the IRS determines that, for at least one month in calendar year 2015, one or more of the employer’s full-time employees was enrolled in a qualified health plan on an exchange for which a premium tax credit was allowed (and the employer did not qualify for an affordability safe harbor or other relief for the employee).
Importantly, an employer having received an exchange subsidy notice indicating that certain employees had received premium tax credits for coverage on an exchange does not necessarily mean it will receive an employer mandate liability notice; however, employers who did not receive an exchange subsidy notice also should not receive an employer mandate liability notice.
Employers who receive Letter 226J will have an opportunity to respond before the IRS assesses any employer mandate liability against the employer and issues a notice and demand for payment. If the employer responds to Letter 226J, the IRS will acknowledge the employer’s response with an appropriate version of Letter 227 (a series of five different letters that, in general, acknowledge the employer’s response to Letter 226J and describe further actions the employer may need to take). If, after receipt of Letter 227 (not available yet), the employer disagrees with the proposed or revised employer shared responsibility payment, the employer may request a pre-assessment conference with the IRS Office of Appeals. Letter 227 and IRS Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don’t Agree (available here), will provide instructions for requesting a conference with the IRS Office of Appeals. Employers will generally have 30 days to respond to Letter 226J and Letter 227.
If, after correspondence between the employer and the IRS or a conference with the IRS Office of Appeals, the IRS determines that an employer is liable for an employer shared responsibility penalty, the IRS will assess the penalty and issue a notice and demand for payment in the form of Notice CP 220J, which will also provide payment instructions.
For now, especially if you expect to receive a Letter 226J, you should make sure you have ready access to data about your 2015 full-time employees, eligibility, offers of coverage, affordability of your coverage, and affordability safe harbors so that you will be prepared to respond within the 30-day window. Hopefully, this information is still accessible and organized from preparation of your 2015 Forms 1094-C and 1095-C.
If you receive Letter 226J and would like assistance with your response, or if you would like assistance with implementing a compliance strategy to avoid future employer mandate liability, please contact your Maynard Cooper benefits attorney.
You can find the IRS’s updated FAQ guidance and other FAQs here.