November 6, 2017 

The IRS recently posted updated Q&As on its website describing how Affordable Care Act (“ACA”) employer mandate penalties would be assessed and contested. The relevant questions are 55-58. Most notably, assessments will begin in late 2017. This alert briefly describes the employer mandate, walks through the process described in those Q&As, and provides some considerations for employers who receive a letter from the IRS.

Background

As a reminder, the employer mandate (also known as employer shared responsibility penalty) applies to Applicable Large Employers (“ALEs”), which are generally those employers with 50 full-time and full-time equivalent employees or more. ALEs may owe a shared responsibility payment if

(a) The ALE does not offer coverage or offers coverage to less than 95% (70% for 2015 only) of its full-time employees (and their dependents), and at least one full-time employee receives a premium tax credit to help pay for coverage through an ACA Marketplace (The “A” penalty, see IRC 4980H(a)); or

(b) The ALE offers coverage to at least 95% (70% for 2015 only) of its full-time employees (and their dependents), but at least one full-time employee receives a premium tax credit to help pay for coverage through a Marketplace. (The “B” penalty, see 4980H(b)).

For impacted ALEs, the A penalty is equal to the number of full-time employees the ALE employed for a calendar month (minus up to 30 (80 for 2015 only)) multiplied by $173.33 (for 2015). If the penalty applies for the full year, the amount is $2,080 (for 2015). The penalty is only assessed for any month in which any employee receives a premium tax credit. Additionally, if the number of full-time employees fluctuates, the monthly penalty amount will fluctuate as well.

If an employer is subject to the B penalty, the monthly amount is equal to $260 (for 2015). The full-year penalty is $3,120. However, this penalty is only multiplied by each full-time employee who actually received a premium tax credit. Therefore, while the penalty dollar amount is larger, the overall penalty may be smaller because it is only multiplied by those full-time employees receiving the tax credits, not all the employer’s full-time employees.

Certain transition relief was also available.

The Beginning of the Penalty Process

The IRS plans to issue the first Letters 226J in late 2017, for the 2015 calendar year which is the first step in assessing an employer mandate penalty. The determination of whether an employer may be liable for a penalty and the amount of the potential payment are based on information reported to the IRS on Forms 1094-C and 1095-C for 2015 (filed in early 2016) and the IRS’s records of who received a premium tax credit.

The Assessment Letter Contents

If the IRS determines that, for at least one month in the year, one or more of the employer’s full-time employees received a premium tax credit and the employer did not satisfy the offer of coverage rules, a Letter 226J will be issued. It is expected to include:

  • a brief explanation of the employer mandate provisions;
  • a summary table itemizing the proposed payment by month and indicating whether liability applies for each month and, if so, whether it’s for the A penalty or the B penalty;
  • an explanation of the summary table;
  • a response form, Form 14764, “ESRP Response”;
  • an employee premium tax credit list, Form 14765, “Employee Premium Tax Credit (PTC) List” which lists, by month, the employees who received a PTC that triggered the letter;
  • the actions the employer should take if it agrees or disagrees with the proposed penalty; and
  • the actions the IRS will take if the employer does not respond in a timely manner.

Contesting an Assessment

An employer that receives a letter will have an opportunity to respond before a penalty is assessed. The letter will provide instructions for how to respond in writing, either agreeing with or disagreeing with part or all of the proposed employer mandate penalty. The letter will contain the name and contact information of an IRS employee that the employer should contact with any questions.

The response to will be due by the response date shown on the letter, which generally will be 30 days from the date of the letter. This is a typical IRS response deadline.

Secondary Appeal

If the employer responds, the IRS will acknowledge the response with another letter (from the IRS’s Letter 227 series, which a series of five different letters developed for this purpose).

After the IRS responds, if the employer disagrees with the proposed or revised penalty, the employer may request a pre-assessment conference with the IRS Office of Appeals. The employer should follow the instructions provided in the IRS response and Publication 5, Your Appeal Rights and How To Prepare a Protest if You Don’t Agree, for requesting the conference. A conference should be requested in writing by the response date shown on the letter, which generally will be 30 days from the date of the letter.

Making the Payment

If, after going through one or more of the above steps, the IRS determines that an employer is liable for a penalty, the IRS will assess the penalty and issue a notice and demand for payment, Notice CP 220J. Note that if an employer doesn’t respond to an IRS letter by the appropriate deadline, that is considered agreement with the letter and the IRS will assess the penalty based on its last letter to the employer.

Notice CP 220J will include a summary of the employer mandate penalty and will reflect payments made, credits applied, and the balance due, if any. That notice will instruct the employer how to make payment, if any. Employers will not be required to include the penalty on any tax return that they file or to make payment before notice and demand for payment. For payment options, such as entering into an installment agreement, refer to Publication 594, The IRS Collection Process.

CONCLUSION

Employers are urged to recognize that this is imminent; the IRS has said it will begin this process in late 2017. It is critical to become familiar with the procedures the IRS will follow as well as the deadlines required for responses. This is important not only for responding to the IRS, but also identifying potential scammers who may use this as an opportunity to call employers requesting payment. Note that the IRS will not use phone or email as an initial point of contact.

Now is also an opportune time for employers to review their offers of coverage for 2015 to help assess whether to expect to receive a Letter 226J. If you lack ready access to well-organized data about your 2015 group health plan enrollment, employee affordability, eligibility, and IRS reporting of your coverage offers (including 2015 Forms 1094-C and 1095-C), don’t panic. If that data is hosted by a payroll provider or reporting vendor, you should contact that vendor and verify access promptly. You may also want to confirm whether transition relief from the employer mandate was available to you in 2015. If you receive an assessment letter, consult with an attorney or accountant who is familiar with the employer mandate in preparing your response.

Please contact your Hub Account Team with any questions.

NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.