By: HUB’s EB Compliance Team
Affordable Care Act (“ACA”) employer mandate enforcement has continued unabated. With that in mind, we offer the following observations based on what we have seen:
- Enforcement seems to be increasing. As time has gone on, it appears 2016 enforcement activity has taken on momentum in part because the transition relief that was available in 2015 was not available in 2016. Therefore, employers who might not have received a 226J Letter in the first round may be getting them now.
- Complexity is increasing. As the volume has increased, so has the complexity.
- As we have noted previously, sometimes the IRS letters are a result of manual reporting mistakes. In many cases, those mistakes are not obvious or intuitive and employers may need some assistance to figure out where the errors lie.
- However, in other cases the letter is the result of filings developed by an automated software tool, such as a payroll vendor or employee benefits management system. When automated software populates the ACA filings, it does so based exclusively on the rules established in the software-setup and the actual data. If the system generated a filing that triggered a 226J letter from the IRS (for example, by reporting “No” on Part III of the 1094-C indicating that the employer did not offer MEC to 95% of its workforce), there may be issues with the underlying data, the actual plan operations (i.e. adds and drops), or both. It is imperative that employers work with their vendor to determine the root cause for the reporting issues.
- In still other cases, the IRS letters actually include IRS mistakes or mismatches between the IRS’s data and the employer’s data. The mistakes may not always be obvious on an initial review. As a result, it is important to work with a subject matter expert who may assist the employer with reducing or potentially eliminating the penalties.
- Finally, the IRS is also sometimes asking for some supporting documentation to back-up the employer’s claim. Previously, the IRS had mostly not asked for that information.
- IRS enforcement for failure to file or distribute is increasing. The IRS has begun reconciling the number of the employer’s Forms W-2 to the Forms 1094-C and 1095-C to audit for compliance. Remember, the ACA filings (Forms 1094-C and 1095-C) are federal tax forms and are subject to the same enforcement as other tax forms. Therefore, an employer who fails to file and distribute the tax forms will face significant penalties that can be as high as $260 for each failure to file or distribute. Note: even employers who chose not to offer any coverage are still required to file and distribute.
- If you aren’t careful, it will get increasingly difficult. These letters should not be taken lightly. The initial response is your last chance to make a first impression with the IRS. The tips we’ve given previously generally still hold true (other than the fact that transition relief is no longer available). However, especially given the increased volume and complexity, employers should consider working with outside advisors and potentially hiring counsel as part of their initial response. An incomplete, or incorrect, IRS response can be harder to correct down the road, which will probably only increase the expense.
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.