November 30, 2018
IRS Enforcement for Calendar Year 2016
The Internal Revenue Service (“IRS”) recently began delivering Letter 226J to certain “large employers” (i.e., employers with 50 or more “full-time employees”) in connection with its enforcement of Section 4980H of the Internal Revenue Code (i.e., “employer shared responsibility payments,” also known as the “employer mandate,” under the Affordable Care Act) in respect to calendar year 2016. Letter 226J sets forth the IRS’s proposed penalty assessment for large employers that, according to the IRS, failed to comply with the substantive requirements under Section 4980H (i.e., to offer “affordable,” “minimum value” health insurance coverage to at least 95 percent of its full-time employees and their dependents) and/or with related reporting requirements. In general, employers that receive Letter 226J will have thirty (30) days to determine whether to accept or reject the IRS’s proposed assessment.
Our experience is that the IRS was lenient in dealing with employers that made an effort to comply with coverage and reporting obligations in respect to calendar year 2015, the first year employers were required to comply with Section 4980H, in that many or most employers who made good-faith mistakes in reporting were allowed to correct them. It is not yet clear whether the IRS will take a similar tack in respect to enforcement for 2016, taking into account that there are critical differences in application of Section 4980H in respect to 2015 vs. 2016: most significantly, employers were only obligated to offer coverage to seventy percent (70%) of their full-time employees and their dependents, whereas the minimum coverage percentage is increased to ninety-five percent (95%) for 2016. Failure to meet the coverage requirement can result in substantial penalties (i.e., $2,160 multiplied by the employer’s total number of full-time employees minus 30).
Reporting Requirements for Calendar Year 2018
Employers should also be aware of the upcoming reporting requirements under Section 4980H in regard to the 2018 calendar year. Specifically:
Large employers must prepare and deliver IRS Form 1095-C to all its full-time employees (i.e., regardless of whether the employee is enrolled in the employer’s health plan) not later than January 31, 2019.
Large employers must prepare and deliver Form 1094-C to the IRS not later than April 1, 2019, together with copies of the Form 1095-Cs delivered to its employees. Form 1094-C must be filed electronically, except that certain “smaller” large employers (generally, those with fewer than 250 full-time employees) may be permitted to file paper returns; provided, however, that paper returns must be filed with the IRS not later than February 28, 2019.
Compliance with Section 4980H has presented numerous headaches for employers, both in confirming compliance with the statute’s coverage obligations and the related reporting obligations. Moreover, feedback regarding reporting and enforcement in regard to 2015 seems to indicate that, notwithstanding their best efforts, employers made various types of mistakes in reporting. As one potentially catastrophic example, certain employers that in fact offered coverage to seventy percent 70%) or more of their full-time employees during 2015 were nearly subject to enormous penalties because their reporting in the Form 1094-C (inadvertently) indicated they did not meet the coverage requirement. We also have seen multiple employers who made mistakes including failing to deliver Form 1095-C to the requisite full-time employees and mistaking proposed assessments for reporting penalties (determined on an employee-by-employee basis, and so generally much smaller) for proposed coverage penalties (determined based on all full-time employees, as noted above). The IRS also has indicated that numerous employers improperly classified employees as “variable hour” employees, to whom employers may not be required to offer coverage to avoid a penalty (i.e., depending on the application of the “look back measurement period”), rather than full-time employees (i.e., based on application of the “monthly measurement period”), and others failed to take into account or correctly apply aggregation rules that may require that employees employed by separate entities under common ownership be “aggregated,” or combined, to determine whether the employer(s) is a large employer, within the meaning of Section 4980H, the applicability or amount of Section 4980H penalties. In any event, employers who receive Letter 226J, as well as employers that are not certain whether they are complying fully with Section 4980H, should consider engaging appropriate legal counsel to assist in responding to the IRS and/or evaluating the effectiveness of their systems in place for complying with the statute.
This Insight is intended only to provide an overview of the matters addressed herein and does not constitute legal advice. If you have questions regarding a specific arrangement with a physician or other health care provider, please seek appropriate legal counsel.