Taxes, Fees & Penalties, Employee Benefits Compliance, Employer Mandate

IRS Employer Mandate Penalty Notices: What to Do if You Receive One

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By Marilyn Monahan, J.D.,  the Monahan Law Office,

Since 2015, applicable large employers (ALEs) have been required by the Affordable Care Act (ACA) to offer their full-time employees (and their dependent children) health coverage or face a section 4980H(a) or (b) employer shared responsibility payment (ESRP).*  (For some employers, transition relief delayed this mandate.) Also since 2015, ALEs have been required to prepare, furnish, and file IRS Forms 1094/1095-C. These forms provide the IRS with data it needs to determine if an ALE owes an ESRP. However, while employers addressed these mandates by spending several years grappling with new administrative challenges and worrying about potential penalties, it did not appear that the IRS had actually assessed any ESRPs. That situation just changed.

The IRS has started issuing notices (specifically, form Letter 226J) advising employers who receive the letter that they owe an ESRP for the 2015 tax year. Further, the letters give employers only 30 days to respond–30 days never seems like enough time to respond to a regulator, but this timeframe will feel particularly short during this already busy period of the year.

What should an employer do now?

  • Watch for a Letter 226J. The letter may not be addressed to an individual (even though employers identified a contact person on the Form 1094-C), so be certain that office staff know to deliver any letter from the IRS to the right person promptly.   In addition to information about employer ESRP liability, the letter contains information about individual employees, so it should be treated as confidential.
  • Make certain the documents for the 2015 tax year that support the data reported in your 1094/1095-C forms are accessible.  You may have to include this documentation in your response.
  • If you receive a letter, calendar the response date, gather your team, gather your documents, and assess the information provided in the letter. The ESRP is “proposed,” and may be challenged.
  • Keep these letters in mind as you prepare to furnish and file the 2017 Forms 1094/1095, and as you design your plan options, eligibility determinations, and employee contributions for the 2018 plan year. The consequences are real.

What Does Letter 226J Contain?

The IRS is using a form letter–Letter 226J–to notify employers that they owe an ESRP. A draft copy of the letter is available at this link:  Two additional forms will be included with the letter: Form 14764 (ESRP Response) and Form 14765 (Employee Premium Tax Credit (PTC) Listing). These forms are available at these links:

An ALE will receive a Letter 226J assessing an ESRP for the 2015 tax year if, for at least one month of 2015, one or more of the ALE’s full-time employees enrolled in an individual marketplace plan (such as one purchased from Covered California), the employee received a premium tax credit (PTC) to help pay for the cost of coverage, and the employer did not qualify for an affordability safe harbor or other relief for that employee (as reported on line 16 of Form 1095-C). The IRS determines which employees received a PTC based on a review of their individual tax returns.

In addition to specifying the amount of the proposed ESRP and describing section 4980H, Letter 226J includes:

  • An “ESRP Summary Table” itemizing the proposed ESRP owed by the employer for each month of 2015.
  • Form 14765–the “Employee Premium Tax Credit (PTC) Listing”–which identifies each employee who received a PTC and also specifies, by month, the line 14 and 16 indicator codes included on the employee’s 1095-C. For example, for each employee who received a PTC, the form might read, by month, “1A/2G,” or “1H/2D,” or “NoPTC” (if the employee did not receive a PTC for a particular month). Also for each individual identified, a second line on Form 14765 is left blank so that the employer can enter any changes to the indicator codes the employer, upon review, may now want to make.
  • Form 14764–the “ESRP Response”–which must be completed by the employer and returned to the IRS. When completing the form, the employer will indicate whether it agrees or disagrees with the proposed ESRP. Form 14764 also includes a phone number to call if the employer wants more time to respond, and a section that may be completed if the employer wants to authorize someone to contact the IRS on the employer’s behalf. Five payment options are also listed; the employer must check all applicable boxes. The options are: full payment electronically, partial payment electronically, full payment by mail, partial payment by mail, or “no payment.”

Whether the ALE agrees or disagrees with the proposed ESRP, the employer must complete, sign, and return the Form 14764 to the IRS. The form must be received by the response date stated in Letter 226J.

An ALE that receives a Letter 226J should carefully study the ESRP Summary Table and Form 14765, and compare the information provided to the employer’s 2015 Form 1094-C, as well as the Form 1095-C for each identified employee. The next critical step is to analyze whether the applicable 1094/1095 forms filed by the employer were completed correctly. 2015 was the first year ALEs were required to complete these forms, and it is possible mistakes were made. In fact, in Letter 226J, the IRS refers to the quoted ESRP as a “proposed” assessment, and also provides a mechanism for challenging the amount assessed and for proposing revisions to the 1094/1095 forms.

If the ALE Agrees with the Proposed ESRP

If the employer agrees with the proposed ESRP, the employer must complete, sign, and return Form 14764. In this event, the employer will check the box that says, “I consent to the assessment and collection of the proposed assessment of the ESRP in the amount of $_________.” Along with the form, the employer may mail its payment to the IRS, or pay electronically if the employer is enrolled in the Electronic Federal Tax Payment System (EFTPS). If the employer does not pay the full assessment, the employer will receive a Notice and Demand for the amount due. Payment options may be available (see IRS Publication 594).

If the ALE Disagrees with the Proposed ESRP

If the employer disagrees with the proposed ESRP, the employer must complete, sign, and return Form 14764. In this event, the ALE will check the box that says, “I disagree with part or all of the proposed assessment of the ESRP.” When returning the Form 14764, the employer should include the following:

  • A signed statement explaining why the employer disagrees with the proposed ESRP.
  • A revised Form 14765, if the employer believes any of the indicator codes provided on the Form 1095-C for an employee identified on Form 14765 were incorrect or incomplete.
  • Documentation that supports the analysis outlined by the employer in the signed statement and the revisions to Form 14765.
  • ALEs should not file corrected 2015 Forms 1094-C and 1095-C at this time.

What Does This Mean for 2017-2018?

ALEs are in the process of preparing their 2017 Forms 1094/1095-C. The 1095-C forms must be distributed to employees by January 31, 2018, and must be filed with the IRS, along with the 1094-C, by February 28th (paper filing) or April 2nd (electronic filing). Letter 226J and the ESRP assessments place renewed emphasis on each employer’s obligation to ensure that these forms are completed correctly. Whether the forms are prepared in-house or through a vendor, employers must be certain–before the distribution and filing deadlines arrive–that they understand the process, have applied the rules correctly, have gathered the necessary data, and have completed the forms accurately.

It is also important to note that, unlike for the 2015 and 2016 tax years, the IRS has not announced that it will grant penalty relief for 2017 forms that are incomplete or inaccurate when filed (if they were prepared in good faith), and it is very possible the IRS will not do so. Further, the 2015 and 2016 penalty relief applies not to the ESRP, but to separate penalties that could be assessed for reporting incorrect or incomplete information to the IRS. In other words, the stakes for employers are high.  Incorrectly completed forms could result in the assessment of an ESRP that should not be owed, along with separate penalties for filing incorrect information with the IRS.

Many ALEs are also in the midst of open enrollment or are strategizing about plan design, eligibility, offers of coverage, and employee contributions for the 2018 plan year. All of these decisions are impacted by the existence of section 4980H, ESRP assessments, and 226J letters. If the goal is to avoid future ESRP assessments, the planning must start now.

On a Related Note . . . No More Silent Returns

The second shared responsibility payment in the ACA applies to individuals. The ACA requires that most individuals (and their family members) have qualifying health coverage or they must pay an individual shared responsibility penalty. The penalty for the 2017 tax year is the greater of (a) 2.5% of gross income, or (b) $695 per adult ($347.50 per child) (with a family maximum of $2,085).

Taxpayers report to the IRS whether they owe the penalty on line 61 of the Form 1040. For the 2016 tax year, the IRS announced that it would not reject returns that were filed with line 61 left blank (this is referred to as a “silent return”). Accepting a silent return does not mean that the taxpayer does not owe the penalty; the IRS has the power to demand payment at a later date.

The IRS announced in October, however, that the situation is changing for the 2017 tax year. When individuals file their 2017 Form 1040, line 61 must be completed; “silent returns” will not be accepted. The IRS explained: “For Tax Year 2017, the IRS will not consider a return complete and accurate if the taxpayer does not report full-year coverage, claim a coverage exemption, or report a shared responsibility payment on the tax return. Most taxpayers have qualifying health coverage for all 12 months in the year, and will check the ‘Full-year coverage’ box on their tax return. Taxpayers who do not have full-year coverage will indicate whether they qualify for a coverage exemption or owe a shared responsibility payment.” (IRS Form 8965 explains who is exempt from the individual shared responsibility payment.)

(*The IRS and section 4980H use the word “payment,” but others may call them penalties or excise taxes. In this newsletter, the terms are used interchangeably.)

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