As I recently discussed in a blog a few weeks ago, the U.S. Department of Treasury is busily reviewing 2015 tax year information and sending IRS Letter 226J to employers it believes owes an Affordable Care Act employer shared responsibility penalty for tax year 2015.
While it may now seem like a lifetime ago, 2015 was the first year ACA shared responsibility applied to most employers, and spring of 2016 was the first time most organizations prepared, distributed, and filed the Form 1095-Cs, along with the Form 1094-C. Treasury is now reviewing those documents, along with other 2015 tax forms, to establish which individuals received premium tax credits for individual coverage purchased on ACA exchanges, and if those individuals can be tied back to full-time work for an ACA large employer that did not offer adequate and/or affordable coverage to this and possibly other individuals in 2015.
Given the catastrophic penalty amounts at stake, the importance of keeping an eye out for these letters and acting quickly, if a letter is received, cannot be overstated. Just last week, a new employer client of mine received this letter. The cited penalty was $300,000. Meanwhile, this employer believed that it had offered adequate and affordable coverage to 100% of its ACA full-time employees in 2015. As we quickly researched, sorted out and addressed this matter, here are eight key things we learned. To follow along in this narrative, it may be helpful to visualize the 2015 Form 1095-C and 1094-C.
1. The window for employers to respond to Letter 226J is really 30 days.
When Treasury announced last fall that the window to respond to this letter would only be 30 days, some wondered if that short of a window would really apply. It did for this employer. However, check the stated response time on any letter received; it could be less than 30 days.
2. Employers had to ask for 2015 Transition Relief to receive it. Really.
Do you remember the Certifications of Eligibility boxes in line 22 of Part II of the 2015 Form 1094-C? Box C in line 22 was “Section 4980H Transition Relief.” My questions in 2015 for our compliance office were, “Wait, what is the point of this box — wouldn’t all employers want to lower their penalty risk by taking advantage of transition relief? Why does Treasury even need to ask this question? And why is the default option not to accept the relief?”
When we first reconciled this employer’s $300,000 penalty against the 2015 monthly 4980H(a) “no coverage” penalty risk, we took the number of ACA full-time employees per month less the first 80, multiplied by $173.33. Oddly, we came up short. We then noticed that Treasury was only reducing the number of full-time employees by the first 30. Bewildered, I asked our attorney why that was, as “less the first 80 was offered transitional relief for 2015. She replied to my question with one of her own: “Did they check box C in line 22 of Part II of the 2015 1094-C?”
3. Treasury is processing these forms as completed by the employer. It is not trying to connect the dots to limit the penalty assessment.
This literal approach seems practical. We can’t expect Treasury to change the answers or codes provided on these forms. In this employer’s case, while the IRS professional reviewing its filings likely suspected that adequate and affordable coverage was offered to all ACA full-time employees, the answers to questions on the 1094-C and the codes used on the 1095-Cs did not make that clear. Thus, Treasury calculated the penalty according to the information provided.
4. Employers should not completely rely on their payroll vendor, third party administrator or specialty vendor to properly populate these forms.
“Trust, but verify,” applies to this process. Scroll through the prepared 1095-Cs, examine the codes — does everything look accurate? How about the 1094-C? Are all answers correct? Do your accountant, attorney, and benefits consultant also agree that the forms are in good order?
In this employer’s case, glaring code errors in lines 14 and 16 of the Form 1095-Cs, as well as obvious mistakes and omissions in the 1094-C, made it clear that the vendor’s ACA reporting administration software, circa 2015, had no meaningful check and balance system. Further, it was clear that this vendor did not have a qualified professional (an actual person) review the resulting forms before they were distributed and filed.
5. Once Letter 226J is issued, it’s too late to refile incorrectly prepared 2015 1095-C and 1094-C forms.
For employers that disagree with the penalty assessment, the letter’s precise instructions must be followed. One of these instructions is to not file corrected forms. Please take the time to read and closely study the letter. Proactive employers can review the letter template here.
6. Employers should be able to precisely tie back the penalty assessment to specific individual 2015 Form 1095-Cs and to information provided in the 2015 Form 1094-C.
A chart accompanying Letter 226J called the “Employee Premiums Tax Credit Listing” will tie the penalty back to specific individuals. Pull the 2015 1095-Cs for these individuals and follow the penalty amount back to the source. In this employer’s situation, we quickly isolated code errors in these 1095-Cs, along with certain 1094-C errors that tied back to the penalty amount.
7. If the Treasury, at the end of the described appeals process, still believes your organization owes a penalty, you’ll likely be able to meet with an IRS representative.
For employers like my client that offered adequate and affordable coverage to 100 percent of its ACA full-time employees in 2015 but were assessed penalties because of vendor errors on the 2015 Form 1095-Cs and 1094-C, having an in-person meeting should allow for an efficient and productive means to demonstrate proof of these coverage offers and explanation for the form errors.
8. If you receive IRS Letter 226J, please seek immediate advice and assistance from your attorney, accountant and benefits consultant.
This employer’s tax attorney was especially helpful in mapping out a specific game plan for the appeals process.
I wish everyone success in their research and appeals process. Naturally, if your research reveals systemic errors in your organization’s 2015 reporting, the next question is if those errors spilled over into the subsequently filed 2016 reporting and any in-progress 2017 reporting.
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