If you were an “applicable large employer” (ALE) in 2015, be on the lookout for an Employer Shared Responsibility Penalty (ESRP) letter from the IRS before the end of 2017. It will be an IRS Letter 226J. You will only receive one if the IRS believes you may owe penalties for not complying in 2015, so we believe all or most of our clients will NOT receive these letters. However, the 2015 information reporting process had a lot of glitches (remember the IRS electronic filing issues?), so some employers who thought they correctly reported might receive IRS 226J letters. If you do receive a 226J letter, you must respond within 30 days!
Did the IRS Issue New Guidance Recently?
Last week the IRS quietly updated its website to clarify that it will soon (“late 2017”) start sending ESRP notices to ALEs whom the IRS believes may owe penalties for not complying with the Affordable Care Act “employer mandate” provisions in 2015. Letters relating to 2016 will likely be sent in 2018. (See Questions and Answers on Employer Shared Responsibility Provisions Under the Affordable Care Act, Questions 55-58, updated November 2, 2017).
This week the IRS posted a copy of the Letter 226J that it will be sending. Click here.
Who was an ALE in 2015?
In 2015, a special transition rule applied, so only employers with at least 100 full-time employee equivalents were considered ALES. Employers with 50-99 full-time employee equivalents were NOT considered ALEs until 2016. To determine employer size in any year, count the number of full-time employee equivalents the employer employed on business days during the prior calendar year. Remember that the “controlled group” rules apply, so be sure to count all employees of all members in the controlled group.
A brief description of the IRS process, from IRS Q/As 55-58
- IRS will send a Letter 226J in late 2017 if it believes an ALE owes an ESRP (employer mandate penalty) for the 2015 calendar year.
- ALE will typically have 30 days from the date on the Letter 226J to respond.
- If an ALE does not respond within 30 days, the IRS will assess the amount of the proposed penalty and issue a notice and demand for payment in the form of a Notice CP 220J.
- If ALE does respond within 30 days, IRS will respond with a Letter 227.
- The IRS has five different forms of Letter 227, depending on the employer’s response to the 226J letter.
- If an ALE agrees with the IRS’s penalty determination, the ALE will complete and return a Form 14764 and include payment for the penalty (or pay electronically using EFTPS).
- If an ALE disagrees with the IRS’s penalty determination:
- The ALE should send back an “ESRP Response” form that explains the reasons for the disagreement, and states what changes the ALE would like to make to the Forms 1094-C and/or 1095-C.
- The ALE also can include supporting documentation, such as employment records or records of offers of coverage.
- The ALE also can send a written request for a pre-assessment conference with the IRS Office of Appeals
- This request generally must be sent within 30 days from the date on the Letter 227.
- If the IRS determines (after the conference or correspondence) that an ALE owes an employer mandate penalty, the IRS will issue a notice and demand for payment — a Notice CP 220J. This Notice will include a summary of the penalty, any payments made, credits applied, and the balance due, plus instructions on how the payment can be made.
What are the Potential Penalties for 2015?
The employer shared responsibility penalties are under Code section 4980H(a) and (b). The “A” penalty is often referred to as the “sledgehammer” penalty (because it could potentially be quite a large amount) and the “B” penalty as the “tack hammer” penalty.
- 4980H(a) – the “A” penalty – applied in 2015 if an employer did not offer at least “minimum essential coverage” (MEC) to at least 70% of full-time employees, and at least one full-time employee bought health insurance in the Marketplace and qualified for a subsidy. The 2015 penalty amount was $177.33/month times the total number of full-time employees the employer had in that month, minus 80 employees. The annual penalty amount was $2,080. Since 2016, the offer percentage was increased from 70% to 95%, and the penalty offset decreased from 80 to 30 employees.
- Practical tip: Since the offer percentage was only 70% in 2015, most IRS 226J letters probably will not be assessing “A” penalties.
- 4980H(b) – the “B” penalty – applied in 2015 if an employer offered coverage to employees, but for one or more full-time employees the coverage was either not “affordable” or did not meet “minimum value.” The 2015 penalty amount was $260/month for each such full-time employee who enrolled in Marketplace coverage and qualified for a subsidy. The annual penalty amount was $3,120. An important difference from the “A” penalty is that the “B” penalty calculation does not take into account all full-time employees.
What If an ALE did Not File a Form 1094-C in 2015?
The IRS letter 226J says that “the IRS used form 1094/5-C filed by the ALE and the individual income tax returns of your full-time employees to identify if they were allowed a premium tax credit.” It sounds like ALES in 2015 who did not comply with information reporting requirements might not be in the pool of ALEs who will receive IRS 226J letters by the end of 2017. However, such employers should not assume they will escape penalties. Remember that separate penalties apply for failure to comply with the employer mandate and for failure to comply with the information reporting requirements (1094-C/1095-Cs). ALEs who did offer coverage but failed to comply with information reporting requirements would be subject to only the information reporting penalties, while ALES who did not offer coverage OR comply with information reporting requirements would be subject to both penalties. ALEs who did not file in 2015 should talk with their legal counsel for advice on whether and when to file.
Won’t the Employer Mandate be Repealed?
Congress has not passed health care reform legislation, although the proposed bills would have essentially repealed the Employer Mandate retroactively to 2015. There are rumors that some members of Congress may attempt to include it in the Tax Bill the House and Senate are currently working on, but don’t hang your hat on that. (Since this article was posted, repeal of the Individual mandate has been included in the Tax Bill, but not repeal of the Employer mandate.) Even if future legislation is enacted that repeals Employer Shared Responsibility, that might not be retroactive repeal back to 2015.
Action Item for Employers
Employers should check with their 2015 Information Reporting vendors now to confirm what assistance they will be providing to employers who do receive 226J letters from the IRS. (Will they be handling this for their clients or just helping them respond, will they provide legal assistance, or will they direct employers to seek their own legal counsel?)
Action Items if You Receive an IRS Letter 226J
The IRS website lists the following action items for employers who receive an IRS Letter 226J:
- Read your letter and attachments carefully. These documents explain the ESRP process and how the information received affects the computation.
- The letter fully explains the steps to take if you agree or disagree with the proposed ESRP computation.
- Complete the response form (Form 14764) indicating your agreement or disagreement with the letter.
- If you disagree with the proposed ESRP liability, you must provide a full explanation of your disagreement and/or indicate changes needed on Form 14765 (PTC Listing). Return all documents as instructed in the letter by the response date.
- If you agree with the proposed ESRP liability, follow the instructions to sign the response form and return with full payment in the envelope provided.
- If you want to allow a third party to contact the IRS on your behalf, send the IRS a Form 2848 (Power of Attorney and Declaration of Representative). Note that the Form 2848 must state specifically the year and that it is for the Section 4980H Shared Responsibility Payment.
List of IRS documents (most links are in the article):
- Letter 226J – initial letter from IRS
- Form 14764 – ESRP Response – Employer’s response to IRS Letter 226J
- Form 14765 – Premium Tax Credit (PTC) listing- Employer who disagrees with IRS Letter 226J must indicate changes needed on this Form
- Letter 227 – IRS response to employer’s response to the 226J letter (IRS has five different forms of Letter 227, depending on the employer’s response)
- Notice CP 220J – IRS notice and demand for payment