The deadline for large employers to file their Affordable Care Act (ACA) reporting Forms 1094-C and 1095-C electronically with the Internal Revenue Service (June 30, 2016) is fast approaching. Information about what comes next is scarce at best.
If an employer owes an “assessable payment” (the IRS’s name for the employer shared responsibility tax under Section 4980H of the Internal Revenue Code (Code), sometimes referred to as the “pay or play” or “employer mandate” penalty), the IRS has said that the employer should not include the payment with its return. Instead, the IRS will calculate the payment and contact the employer to inform it of any potential liability. At that point the employer will have an opportunity to respond before any assessment is made. If the IRS determines that the employer is liable for the tax, it will send a notice and demand for payment.
Note that this IRS notice and demand is not the same as the certification that an employer may receive from a state exchange (or marketplace) that one or more employees have received a premium tax credit. These certifications are sometimes called “marketplace notices,” and there is an entirely separate process for responding to and/or appealing them. Employers are not prejudiced with respect to an assessable payment by failing to respond to or appeal a marketplace notice.
Regarding the timing of assessable payments, the IRS has said that it does not intend to contact an employer about an assessable payment until after the due date for the individual income tax returns of the employees of that employer. Although the IRS has not explicitly said so, we believe this means the due date after taking into account any extensions that might apply. Accordingly, employers should not expect to be contacted by the IRS regarding an assessable payment until after October 17, 2016, which is the deadline for individual income tax returns for 2015.
There has been much speculation about the IRS’s ability to process the shared responsibility returns and impose assessable payments. Some have said they doubt the IRS is capable of responding to the deluge of returns that will be filed. We believe that it will be relatively easy for the IRS to identify an employer who owes an assessable payment under Code Section 4980H(a)– that is the tax ($2,080 per full-time employee for 2015) that is owed when an employer fails to offer substantially all of its full-time employees minimum essential coverage. In many, if not most cases, substantially all of the data for determining the 4980H(a) tax is on the face of the return. The principal exception is the determination that at least one full-time employee has obtained a premium tax credit from the state exchange. The tax is calculated (generally on a monthly basis) by multiplying the number of full-time employees, which is reported on lines 24 through 35 of the Form 1094-C, reduced by 80, times $173.33, which is the monthly tax under 4980H(a) (the annual tax for 2015 of $2,080 divided by 12). If the employer is reporting its full-time employee count for all 12 months on line 23, then the tax is calculated by multiplying the number on line 23, reduced by 80, times the annual tax ($2,080 for 2015). If the employer is part of an aggregated applicable large employer (ALE) group, then the IRS must reference the Forms 1094-C of other members of the group in order to determine the number that should be used to reduce the full-time employee count in determining the tax. For the entire aggregated ALE group, the number is 80 for 2015. That number is allocated among the members of the group in proportion to each employer’s number of full-time employees
The calculation of the Code Section 4980H(b) tax is a much more complicated process. The 4980H(b) assessable payment is the tax that an employer owes for each full-time employee who buys subsidized health coverage (obtaining a premium tax credit) from a state exchange. (Note that an employee will not be eligible for a premium tax credit if the employer has offered affordable coverage that provides minimum value.) To calculate the 4980H(b) tax ($3,120 per applicable full-time employee for 2015), the IRS will need to know which of the employer’s full-time employees has claimed the premium tax credit on his or her individual tax return for each calendar month. Only then can the IRS calculate the assessable payment owed by the employer. We expect this may take some time since it requires coordination of data received from the employer on the Forms 1095-C it files and from the individual tax returns of the employers’ employees.
Employers should be prepared to respond to an IRS contact regarding a potential assessable payment. Those individuals who are listed as the contact person on the Form 1094-C filed by the employer should have in place a game plan. Boutwell Fay is ready to assist employers to respond to IRS inquiries.
Those large employers who have not filed or furnished their ACA reporting forms by the applicable deadlines are potentially subject to information reporting penalties. Employers that have failed to comply with the reporting requirements should know that the penalties increase over time, so an employer can reduce the potential penalties by completing the reporting sooner rather than later. The IRS has said that it will not impose penalties for reporting incorrect or incomplete information if the employer can show that it made a good faith effort to comply with the reporting requirement for 2015. However, in order to qualify for this relief, the employer must timely file the required returns and furnish to employees the required statements. Even if an employer fails to timely comply with the reporting requirements, it may still be eligible for penalty relief under Code Section 6724 if it can show reasonable cause.
© Boutwell Fay LLP 2016, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of June 30, 2016.