Enforcement of the Affordable Care Act’s (“ACA”) employer mandate has featured some consistent themes and mistakes. If you aren’t familiar with the mandate, see our previous article. Employers receiving an IRS Letter 226J should consider the following:
- More Efficient Enforcement: The IRS initial letters were for 2015 and focused on the “A” penalty, which applies to Applicable Large Employers (“ALEs”) that did not offer coverage or that offered coverage to less than 70% (95% for 2016 and later years) of their full-time employees (and their dependents).
- Previously, if an ALE successfully challenged the “A” penalty, the IRS would issue a second letter pursuing enforcement of the “B” penalty.
- The “B” penalty applies to employers that offered coverage to enough full-time employees (and their dependents) to avoid an “A” penalty, but their coverage was either unaffordable or did not provide minimum value.
- The “B” penalty is usually smaller than the “A” penalty (it can never be larger).
- However, rather than going through the “A”-“B” two-step, the latest Letters 226J address both the “A” penalty and the “B” penalty of the Employer Mandate.
This is a sign that the IRS is becoming more efficient. However, employers can only be liable for one of the two penalties (A or B) for any given month, not both.
- Responding to Letter 226J: We previously advised that employers include supporting documentation (waiver or election forms, contribution amounts, Summaries of Benefits and Coverage, etc.) when they respond to the IRS. However, we are aware that the IRS has sometimes requested employers not send supporting documentation with their response. Employers (or their representatives) should contact the IRS agent who sent the letter to ask whether the agent wants additional documentation (and if not, consider mentioning that in your response and offering to provide it later). Even if the agent does not, we strongly recommend that employers gather and retain the relevant documentation. This way, the employer can verify any statements made to the IRS and have the documentation on hand in case it is needed later.
- Mistakes Triggering Letters 226J: Many Letters 226J are the result of mistakes in filling out the Forms 1094/1095-C. Common mistakes include:
- Form 1094-C, Part III, Column A - Lines 23 through 35 ask the employer to check “Yes” or “No” to confirm whether an offer of minimum essential coverage was made to 95% (70% for 2015 only) of its full time employees. In some cases, employers (or their vendors) checked the “No” box when they should have checked “Yes.” We have also seen instances where “Yes” was correctly checked on the original Form 1094-C, but the IRS records reflected “No.”
- Not reflecting any applicable form of transition relief on Line 22 and Line 23(e) of Form 1094-C.
- Completing Line 14 of Form 1095-C showing an offer of coverage was not made (1H) or that an offer of coverage was made (1E), but leaving Line 16 (the “2” codes) on Forms 1095-C blank. As a result, the employer failed to identify why it did not owe a penalty for that month, such as (1) the employee’s premium meets an applicable affordability safe harbor; (2) the employee was in a limited non-assessment period; (3) the employee was not a full-time employee; or (4) the employer qualified for transition relief.
- IRS Mistakes: The IRS has also made some apparent mistakes in generating its Letters 226J. For example:
- The “A” penalty is generally calculated based on the number of the employer’s full-time employees, minus 30. For 2015, the IRS allowed an 80-employee reduction rather than 30, subject to certain conditions, as a form of transition relief. However, in some Letters 226J for 2015, the IRS appears to have provided only a 30-headcount reduction even when the employer is eligible for 80.
- In some instances, the IRS appears to have not applied any transition relief for non-calendar year plans, even if the 1094-C forms were completed correctly. Therefore, employers should check the IRS Letter and be sure to respond by identifying any applicable transition relief.
- Employers with several entities that are part of the same controlled group are subject to certain special penalty calculation rules. For example, the IRS should allocate the 30 (or 80, for 2015)-person headcount reduction across all the entities in the same controlled group. However, the IRS has sometimes sent Letters 226J separately to each entity and did not take into account all of the entities belonging to the same controlled group.
- Responding to a Letter 226J: Remember to:
- Complete and sign Form 14764 entitled “ESRP Response”;
- Update Form 14765 (if applicable) entitled “Employee Premium Tax Credit (PTC) Listing”; and
- Write an appeal letter to the IRS.
Employers should be sure to complete all three parts in responding (to the extent necessary). Additionally, we recommend following our top 10 tips for replying to a Letter 226J.
- Be Timely: Burying your head in the sand and ignoring the IRS is not advised. The Letter 226J generally requires a response within 30 days of the date of the letter (we understand extensions can be requested). If you receive a Letter 226J and you don’t respond timely, the IRS will just assess the penalty. If the IRS does not receive a response to the assessment, they will likely send you a notice of a levy against your business’s assets. Once you’ve responded, be on the lookout for the appropriate version of IRS Letter 227.
What you can do today:
As a reminder, HUB recommends employers:
- Notify HR and finance employees (along with anyone who receives/opens mail) of the possibility of these letters so they know to look for them.
- Check the contact person listed on IRS Forms 1094-C for all prior years and be sure mail addressed to that person gets forwarded if they are no longer with the company.
- Open any mail from the IRS immediately!
- Retain copies of Forms 1094-C and 1095-C. If you are contemplating changing vendors, be sure you obtain copies of the forms from them before you issue a termination/cancellation notice to the vendor.
- Avoiding Letters 226J: As a preventive mechanism, review prior years’ forms to ensure all appropriate boxes are checked and the right codes are reflected in Line 16 of the Forms 1095-C (if applicable). Consider refiling forms for prior years if mistakes are identified.
HUB will continue to monitor these developments and provide additional updates as new information comes to light.
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.