Maybe your company thought it wasn’t subject to the Affordable Care Act (“ACA”) employer mandate or reporting requirements. Maybe your company thought it didn’t have to report to the IRS about the coverage it offered because the insurer was reporting or because your parent company was filing returns on behalf of its subsidiaries. But maybe the IRS doesn’t agree.
Recently, the IRS started sending Letters 5699. This letter basically says, “The IRS thinks you might have needed to do ACA reporting, but didn’t get your forms.”
While it is not clear how the IRS identifies employers who might be subject to reporting, but didn’t file, the IRS may be identifying potential non-filers from Form W-2 filings or other tax filings. In other words, if the IRS receives 200 W-2s under the same tax ID number/EIN, for example, the IRS may believe that the employer is subject to ACA reporting. As such it might send a Letter 5699 to that employer inquiring why Forms 1094/1095-C were not filed.
Which Employers are Affected
As we have detailed elsewhere, the ACA employer reporting mandate (sometimes called the “employer shared responsibility penalty”) applies only to “applicable large employers” or ALEs. Generally, ALEs are employers that employed, on average, 50 or more full-time and full-time equivalent employees in the prior calendar year. In addition, there are separate, and sometimes overlapping, reporting requirements for insurers and employers, which adds further complexity.
This complexity has led to a few common misconceptions about the ACA employer reporting and mandate such as:
- We don’t have 50 full-time employees, so these rules don’t apply to us. As noted above, in determining ALE status, employers must include “full-time equivalent” (FTE) employees in their calculations. The number of “full-time equivalent” employees is based on the hours worked by non-full time employees (employees working less than 120 hours per month). What makes it confusing is that employers only have to report on full-time employees. For example, an employer with 10 full-time employees and 200 part-time employees would likely be an ALE, but would only have to report on the 10 full-time employees.
- Our employees are in separate companies, under separate tax ID numbers/EINs, and none of the companies is over the 50 full-time and full-time equivalent employee threshold, so these rules don’t apply to us. ALE status is based on the number of full-time and FTE of the entire controlled group. This could include parent-subsidiary companies where the parent owns at least 80% of the subsidiary or sister companies. It could also include entities with a small group of the same owners. In the non-profit space, it can also include entities with common board membership. These rules are complex and HUB recommends seeking experienced tax counsel if you have questions about controlled group status.
- We filed all our forms under one tax ID number/EIN. This is the other side of the coin from #2. In this case, the employer recognizes that there is a controlled group, but thought that only one filing was necessary for all companies in the controlled group. Unfortunately, a separate Form 1094-C is required for each entity in the group, and each entity is also required to issue Forms 1095-C, for its own full-time employees.
- I’m fully-insured, so the insurer handled reporting for me. The insurer has to report on coverage it actually provided. However, employers that are ALEs are still required to report on the offer of coverage that they made (whether employees took the coverage or not).
If you receive an IRS Letter 5699, you should respond accurately and promptly. Most likely, the letter will say a response is due within 30 days from the date reflected on the letter, so you may not have much time. The letter offers five possible response options:
- I was an ALE and I’ve already filed. This could happen, for example, if you filed under an incorrect tax ID number/EIN or if you filed after the due date for filing. In this case, fill out the form with the company name and EIN the forms were filed under and the date they were filed.
- I was an ALE and my forms are included in this letter. You select this option if you realize that you were an ALE, but haven’t filed yet. In this case, complete the forms and attach them to your response. However, if you have to file more than 250 Forms 1095-C, you are required to file electronically via the IRS AIR System. This means you cannot use this option. Instead, you should use the third option below.
- I was an ALE and I will file. In this case, include the company name and EIN that is filing and state the date by which you expect to file. Be sure to give yourself enough time to prepare the forms (if you don’t already have them available). The Letter 5699 here says that if you will file more than 90 days after the date of the letter, you have to explain under the “Other” field (option 5 below).
- I was not an ALE. If you have done the math and concluded that you are not an ALE, you mark this option. Be sure to confirm that your calculations are correct and keep records to show your work. HUB can help provide information on this calculation, or you can alternatively use the IRS ALE estimator to determine if you are an ALE.
- Other. If your response does not fit into one of the above, then you can explain why returns were not filed. This could be useful, for example, if you acquired a company and cannot locate the records to determine if returns were filed or if your records were destroyed in a natural disaster.
Whatever your response, you want to make sure you reply to the IRS on a timely basis and file returns (if applicable) as quickly and accurately as possible. The penalties for failing to file can be as high $530 per IRS form. Additionally, if the Forms 1095-C were not provided to employees, then you could have to pay an additional $530 per Form 1095-C.
However, employers that did not file when they should have may identify other concerns. For example, if you didn’t know you were subject to the ACA employer mandate, then you may not have offered coverage to all your full-time employees. Alternatively, your coverage may not have been “affordable” or provided “minimum value,” as defined in the ACA. Therefore, filing for the first time now may trigger an employer mandate assessment. Employers in that situation should be prepared to respond to a Letter 226J when that letter arrives.
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.