By: HUB’s EB Compliance Team

A recent IRS Chief Counsel Memo (“CCM”) concluded that there is no time limit for the IRS to assess the Affordable Care Act (“ACA”) employer mandate penalties. This has severe implications for employers subject to the ACA employer mandate.

Background

As frequent HUB readers are aware by now, applicable large employers (generally those with more than 50 full-time and full-time equivalent employees in the prior year, more detail in our articles here) are subject to the ACA employer mandate. The ACA employer mandate requires those employers to offer health coverage meeting certain requirements to their full-time employees and their dependents or pay a penalty. (For this purpose, full-time means the employee is reasonably expected to work, or actually works, at least 30 hours/week.)  However, a penalty is only triggered if a full-time employee receives subsidized individual coverage from an ACA Exchange/Marketplace.

In addition, applicable large employers are required to report to the IRS on the coverage they offer on Forms 1094-C and 1095-C. This reporting is done for each full-time employee. It includes information about whether coverage was offered to the employee and, if so, whether the coverage is affordable and provides minimum value. The one key piece of information the reporting does not include is whether the employee received subsidized coverage through an Exchange. Employers may not know that at the time they file their returns; that information is known to the IRS because the IRS provides the subsidy.

The CCM

Chief Counsel Memos are internal IRS memoranda where the IRS’s lawyers give direction and guidance to IRS agents. While they are not binding on the IRS, they are reflective of the IRS’s views and of how the IRS will enforce the law.

Under the tax code, the maximum period the IRS can pursue taxes or penalties is called the “statute of limitations.” In general, the statute of limitations is three years from when a “return” is filed.   If a return is never filed, there is no time limit on the IRS’s ability to pursue the tax or penalty.

The CCM concludes that the ACA Form 1094-C and 1095-C do not provide enough information to qualify as a “return” under the tax law. Specifically, because they do not specify whether any employee received a subsidy for individual coverage, the forms do not provide enough information to calculate the ACA employer mandate penalty. By contrast, a normal tax return (like a Form 1040 that individuals file) has all the information needed to calculate the tax owed. However, because the Forms 1094-C and 1095-C lack crucial information to calculate the penalty, they are not “returns.” Therefore, the CCM concludes, there is no time limit on the IRS’s ability to assess the employer mandate penalty.

Implications for Employers

This is not good news for employers. It means the IRS can pursue potential employer mandate penalties, in theory, forever. As a result, employers need to keep records of the coverage they offered for as long as possible. This includes copies of:

  1. Insurance policies or other plan documentation
  2. Offers of coverage (which may include screenshots of online enrollment options or paper forms)
  3. Documentation of waived coverage
  4. The Forms 1094-C and 1095-C

This also means that when an employer switches insurance carriers, third party administrators, or ACA reporting vendors, they should request copies of all documentation before terminating the contract. Many vendors will only maintain documentation in accordance with their document retention policies. These vary widely, but they are not indefinite.

Fortunately, we are only a few years into the ACA employer mandate and reporting, so the records are not that old at this point. As a practical matter, the IRS is unlikely to pursue potential penalties that are decades old (when we get there) because of the difficulty in proving aspects of the penalties and the potential for lost records. However, if the IRS chooses to, there is currently no legal time limit on their ability to pursue them. Unless and until Congress amends the law to add a time limit for these penalties, employers should maximize their record retention to the extent they can.

If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.

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.