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Employers with 50-Plus Full-Time Employees Should be Prepared to Respond to IRS Penalty Notices under ACA

September 27, 2018

By Kara Backus

Late last year, the IRS began enforcing the employer mandate under the Affordable Care Act (the “ACA”) by sending letters to large employers containing proposed Employer Shared Responsibility Payments (“ESRPs”).  The ESRPs outline penalties under Section 4980H of the Internal Revenue Code (the “Code”) for an employer’s failure to meet the requirements of the employer mandate.  Those enforcement efforts related to the 2015 tax year, for which only employers with 100 or more full-time and full-time-equivalent employees are subject to penalties.  Starting soon, however, employers with 50 or more full-time and full-time-equivalent employees should be prepared to respond to such letters from the IRS with respect to the 2016 tax year.

According to a New York Times report in the spring of 2018, the IRS had issued penalty notices to at least 30,000 employers.  The numbers will likely increase substantially during the enforcement period for the 2016 tax year because the number of employers subject to penalties increased for that year, and also because employers were required to cover a larger percentage of full-time employees than in 2015, making it easier to become subject to a penalty.  For 2016, penalties are imposed if the employer fails to offer health insurance to 95% of its full-time employees and their dependent children (the “subsection (a) penalty”), or fails to offer a minimum required level of benefits that is affordable (the “subsection (b) penalty”). 

Employers identified by the IRS as owing a penalty will receive Letter 226J, which states the proposed penalty amount and provides general instructions for how to respond.  The letter lists the penalty assessed for each month of the year, whether the penalty was assessed under Code section 4980H(a) or (b), and for how many employees the penalty applies.  Attached to Letter 226J are two forms:  Form 14765 and Form 14764.  Form 14765, the Employee Premium Tax Credit (PTC) Listing, lists employees who triggered the penalty by receiving a premium tax credit from a state or federal health care exchange.  Form 14764 is the ESRP Response form for employers to use in communicating with the IRS.

If an employer wishes to contest the ESRP, it can make corrections to the PTC Listing and attach additional information.  The employer must also complete the ESRP Response, indicating whether it agrees with the assessment (and will pay the penalty), disagrees with the assessment, or partially disagrees (and will make a partial payment).  The employer must complete and return the forms within 30 days, or the IRS will issue a Notice and Demand for payment, which is the actual tax bill for penalties owed.  If the employer needs additional time, it is possible to seek an extension.  The IRS will review the employer’s ESRP Response and issue an updated determination.  If the employer still disagrees, it may request a pre-assessment conference with the IRS Office of Appeals.

If you are an employer at risk for penalties, communicate internally with your HR and finance departments and your management team to be prepared to make a timely response.  It is very helpful to have copies of the information reports filed on Forms 1094-C and 1095-C that you submitted for the reporting year in question in order to assess the ESRP.

If you receive a penalty notice, review it carefully, understand what penalties are being assessed and why, and correct any erroneous information relied upon by the IRS in calculating the penalties.  Reach out to your benefits counsel and advisors before paying any penalty that you think could be avoided.
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