30 Days to Act on IRS Letter 226J

Nestled amid holiday cards may be a less welcome letter from the IRS. The IRS has confirmed that the initial notices to employers that they may owe employer shared responsibility (ESR) penalties are going out before year-end. Letter 226J will address preliminary calculations of amounts employers owe for tax year 2015.

Employers subject to the ESR provisions are those employers who met the definition of an “applicable large employer” or ALE.  ALE status, according to the IRS, is determined each calendar year, and generally depends on the average size of an employer’s workforce during the prior year.  An employer who has at least 50 full-time and full-time equivalent employees on average during the prior year is an ALE for the current calendar year.

For calendar year 2015, the Employer Shared Responsibility Payment (ESRP) amounts are $2,080 and $3,120.

What Employers Must Do

First and most important is that employers should not ignore this letter. In fact, with only 30 days to respond, employers should be on the lookout for the letter which is expected to be sent before the end of this year.

Employers must tell the IRS whether they agree or disagree with the IRS’ assessment.

If the employer agrees with the findings in the letter he must complete, sign and date the Form 14764 response. It must be sent by the date indicated on the first page of the letter. Payment should accompany the letter or it may be paid electronically.

An employer that disagrees with the IRS’ assessment must also complete Form 14764. There must be a signed statement explaining the areas of disagreement. Documentation supporting the statement must be provided. Employers providing added documentation should indicate this by entering a check in the column on the Employee PTC listing titled “Additional Information Attached.”

Employers are not directed to file a corrected Form 1094-C. Instead, any changes should be made on the Employee PTC Listing.

The IRS will reply with an acknowledgement letter following the employer’s response that provides their final determination.

If the employer does not respond within the time frame the IRS will send a Notice and Demand for the proposed amount in the letter 226J. The amount will be subject to IRS lien and levy enforcement actions. Interest will also accrue from the date of the Notice and Demand and continue until the amount due is paid.

Note that the ESRP is not deductible for income tax purposes.

Employers should keep a copy of the letter and any documents that are submitted to the IRS.

The IRS has a web page to explain the letter 226J. It can be found here.

IRS Drops the Mic on Employer Shared Responsibility Payments

Employers who have been counting on the IRS to forget about employer shared responsibility payments apparently have run out of luck. The IRS recently revised one of their FAQ documents to outline their upcoming issuing of penalty demand letters.

Employers can look forward to receiving Letter 226J. The letter will include:

  • A summary table itemizing each month an employer may be liable for a payment
  • A response form, Form 14764, “ESRP Response”
  • Form 14765 which will list by month an ALE’s assessable full-time employees
  • A description of actions the ALE employer should take to dispute the letter’s findings.

The Letter 226J will include a due date for the employer’s response. It will generally be 30 days from the date of the letter. If an employer doesn’t respond or doesn’t respond timely, the IRS will issue a notice and demand for payment, Notice CP 220J.

Letter 226J can be found here https://www.irs.gov/pub/notices/ltr226j.pdf

Samples of the letters and forms are not yet available for review. However, the IRS states that the Letter 226J for calendar year 2015 will be issued in “late 2017.”

The IRS FAQs that provide details are numbered 55-58 and can be found here.

IRS Invokes ACA Individual Health Care Reporting Requirement

The IRS has announced a change of course regarding individual tax returns and ACA compliance. Individual tax returns filed in the 2018 filing season will not be accepted if the taxpayer does not indicate whether they had health coverage.

The IRS had previously planned to reject returns without the health coverage information during the 2017 filing season. They reversed course early in 2017 to respond to the Trump administration’s executive order to reduce administrative and regulatory burdens. This latest October 2017 announcement provides ample time for taxpayers and their tax advisors to prepare for this change.

The IRS is instructing taxpayers to indicate on their Forms 1040 whether they and everyone else on their return had minimum essential coverage, qualified for an exemption or whether they are making a payment for not having coverage.

The IRS statement on the reporting requirement and resources for tax professionals can be found here.

Taxpayers who fail to report whether they had coverage could face penalties for late filing due to the IRS not accepting a return. The IRS will not accept returns that omit the coverage information. As such, a person filing on April 17, 2018 who has their return rejected would be considered to be a late filer when they finally correct their omission. Note: The filing date for 2018 is shifted as April 15, 2018 is a Sunday and Monday is the Emancipation Day holiday in Washington, D.C.

Archived IRS tax tips note that there are eight (8) important points for filing or paying taxes late. Of note, both late filing and late payment penalties may apply in some situations. The maximum amount charged for the two (2) penalties in 2017 is five percent (5%) per month. IRS facts about late filing can be found here.

More information on the individual shared responsibility provision can be found on the IRS website here.

ACA Employer Reporting Preparation Tips and Reminders

The bad news – for some — is that the ACA, including employer reporting, is still here despite the months of Congressional activity. The good news – for many employers subject to the ACA’s employer reporting requirements — is that the reporting forms are pretty much unchanged from last year. Few changes mean that many of the lessons learned over the past years don’t have to be jettisoned.

Due Dates

And, it’s not too soon for employers to prepare for filing of Forms 1094-C and 1095-C. For calendar year 2017, Forms 1094-C and 1095-C must be filed with the IRS by February 28, 2018 on paper or April 2, 2108, if filing electronically. Forms must be furnished to employees by January 31, 2018.

Forms and Instructions

The 1095-B Form for 2017 can be found here.

Instructions for Forms 1094-B and 1095-B can be found here.

The 1094-C Form for 2017 can be found here.

The 1095-C Form for 2017 can be found here.

Instructions for Forms 1094-C and 1095-C can be found here.

Q&A about Information Reporting by Employers can be found here.

Employers wishing to use a substitute Form 1094-C or 1095-C can find guidance in Publication 5223.

Tips and Reminders

Here are some reminders and tips on completing these forms.

Employers planning to use a vendor need to make decisions now, if they haven’t already. Time is needed to understand how information must be presented to the vendor and to allow time for preparation, testing and the like.

Box 10 of Form 1095-C asks for the employer’s contact number. It’s important that this number connects to a person who understands the employer’s reporting process or that the person answering the phone knows who to contact internally.

Statements must be furnished on paper by mail or hand delivered unless there is affirmative consent by the recipient to receive the statement electronically. Information on consent to receive electronic statements can be found here.

Consent to receive statements electronically should address the duration of the consent. If consent forms used last year didn’t specify that consent would be ongoing, new consent may be required for this year.

The Federal Poverty Line Safe Harbor maximum monthly employee contribution for 2017 is $95.93.

There is no specific code to enter on Form 1095-C if an employee has waived coverage. When an employee has waived coverage it behooves the employer to complete line 16 with a safe harbor code, if any applies.

Information reporting penalties may apply for failing to comply. For example, failure to file a correct return is $260 per return. Special rules apply for penalties due to intentional disregard.



October Due Date for Medicare Creditable Coverage Notices

Employers with Medicare eligible participants must provide a notice that specifies whether the plans that they sponsor constitute creditable coverage for Medicare Part D. The notice must be provided in conjunction with the Medicare Part D annual election period which begins on October 15.

This notice must be provided to all Medicare eligible individuals who are covered or eligible for a plan that includes prescription drugs.  Notices must be provided to those individuals on COBRA as well.

Employer plan sponsors are required by CMS to provide creditable coverage status to Part D eligible members at least once a year and at the following times:

  • Prior to an individual’s initial enrollment period;
  • Prior to the effective date of coverage for any Medicare-eligible individual that joins your plan;
  • Whenever prescription drug coverage ends or changes so that it is no longer creditable or becomes creditable;
  • Prior to the Medicare Part D Annual Coordinated Election Period beginning on October 15 of each year; or
  • Upon the request of a beneficiary.

Models of the notice are available here.  There are model notices for both creditable and non-creditable coverage in both English and Spanish.

Creditable coverage is defined as coverage that equals or exceeds the actuarial value of standard prescription drug coverage under the Medicare prescription drug benefit. And in communications to Part D eligible individuals, CMS has described creditable coverage as prescription drug coverage that “is, on average for all plan participants, expected to pay out as much as standard Medicare prescription drug coverage pays.”

Employers with insured plans should have received guidance from their carriers indicating whether their plan is creditable or not. In many cases, a high deductible health plan (HDHP) may not be creditable coverage.

Employers can use a “simplified” means to determine whether coverage is creditable or not. The plan must meet four (4) standards to be deemed creditable. A prescription drug plan is deemed to be creditable if it:

1) Provides coverage for brand and generic prescriptions;

2) Provides reasonable access to retail providers;

3) The plan is designed to pay on average at least 60% of participants’ prescription drug

expenses; and

4) Satisfies at least one of the following:

a) The prescription drug coverage has no annual benefit maximum benefit or a maximum annual benefit payable by the plan of at least $25,000, or

b) The prescription drug coverage has an actuarial expectation that the amount payable by the plan will be at least $2,000 annually per Medicare eligible individual.

c) For entities that have integrated health coverage, the integrated health plan has no more than a $250 deductible per year, has no annual benefit maximum or a maximum annual benefit payable by the plan of at least $25,000 and has no less than a $1,000,000 lifetime combined benefit maximum.

An integrated plan is any plan of benefits that is offered to a Medicare eligible individual where the prescription drug benefit is combined with other coverage offered by the entity (i.e., medical, dental, vision, etc.). The plan must have all of these provisions:

  • A combined plan year deductible for all benefits under the plan
  • A combined annual benefit maximum for all benefits under the plan, and
  • A combined lifetime benefit maximum for all benefits under the plan.

The Creditable Coverage Simplified Determination process guidance is here.

Employers with account based plans may find that their coverage is creditable despite the carrier’s assessment. Coverage may be creditable if the employer has an HRA arrangement. The HRA amount may factor in to the creditable assessment in whole or in part depending on how the plan is structured. Guidance on determining creditable coverage status with account based plans, including HRAs, can be found here.

Individuals should keep any notice in case it is required when they decide to sign up for Medicare Part D. The notice may be necessary to show that they had creditable coverage and are not, therefore, subject to the penalty of one percent per month for late enrollment.

Employers also have an obligation to advise CMS whether coverage is creditable or not. The Disclosure to CMS Form can be found here.

EAPs Pose Compliance Complications

Employee Assistance Plans (EAPs) are popular employer-sponsored plans that help employees address personal and work related problems that impact their health or job performance. Benefits provided by EAPs are varied in both scope and breadth. Benefits may include:

  • Mental health referral services
  • Mental health counseling
  • Financial counseling
  • Drug or alcohol abuse counseling
  • Assistance with addressing major life events.

The wide variety of EAPs allow employers to find a plan that is both affordable and of value to employees. But, this variety also makes it difficult to determine the compliance requirements that surround an EAP. And, sometimes EAP services may even be included in life or disability packages.


To determine if an EAP is subject to ERISA, it depends on whether the plan provides medical care. If a plan provides medical care it is subject to ERISA. The federal Department of Labor (DOL) has issued advisory opinions that an EAP with trained counselors who provide counseling services is providing medical care. Of note, the trained counselors do not have to be doctors or psychologists to meet this threshold.

A plan that only provides referrals to counselors may not be deemed to “provide medical care” and may, therefore, not be an ERISA plan. However, if the service providers that make the referrals are trained in a field related to the EAP’s services, this could mean that the plan would be deemed to provide medical benefits.

ERISA also applies only when a plan is “established or maintained” by an employer. If the employer doesn’t contribute to the cost of the EAP or otherwise endorse the EAP, it may not be considered as “established or maintained” by the employer.

If a determination is made that the plan is subject to ERISA, then the plan is subject to ERISA’s plan document, Summary Plan Description (SPD) requirements and other ERISA provisions. Of note, information provided by the EAP vendor may not be sufficient to meet ERISA requirements.


If the plan provides counseling it would be considered a group health plan that is subject to COBRA. EAPs are generally offered to all employees, even those who may not participate in the employer-provided health plan. As such, an EAP subject to COBRA requires that the COBRA initial notice be provided to all EAP-eligible employees.

To determine the applicable COBRA premium, employers should determine the premium attributable to the health care related benefits only. For example, the premium attributable to job counseling or financial counseling services would not be included in the COBRA premium.

Open enrollment presents yet another challenge. If an employee continues EAP coverage under this scenario, but the employee was eligible for the group health plan, but not enrolled, then an opportunity to elect the health plan would be required.

Employers may limit eligibility for the EAP to those employees who enroll in the group health plan to avoid this COBRA complication. But, limiting coverage to those participating in the group health plan poses ACA problems as the next paragraphs illustrate. Alternatively, the EAP’s benefits may continue after what would be a qualifying event for 36 months. As a result, there would be no loss of EAP coverage and no COBRA trigger.

Affordable Care Act (ACA)

EAPs posed particular problems after enactment of the ACA. The DOL and Treasury departments issued rules that EAPs would be considered “excepted benefits” and, therefore, exempt from the ACA.

An EAP is considered an “excepted benefit” if four requirements are met:

  1. They must not provide significant benefits in the form of medical care. The amount, scope, and duration of covered services will be considered in evaluating compliance with this requirement.
  2. EAP benefits may not be coordinated with group health plan benefits
    1. EAP participants may not be required to use or exhaust EAP benefits before they are eligible for group health plan benefits
    2. Eligibility for EAP benefits may not be made dependent on participation in another group health plan
  3. No employee premiums or contributions can be required for participating in an EAP
  4. An EAP that is an excepted benefit may not impose cost-sharing requirements.

The final rule that includes these requirements is here.

Health Savings Accounts (HSAs)

Since EAP plans often include coverage for services irrespective of the employer’s high deductible health plan (HDHP), this raises the concern that an EAP could cause a person to lose eligibility to contribute to an HSA. The IRS has provided guidance that an EAP is not a health plan if it does not provide “significant benefits in the nature of medical care or treatment.”

IRS Notice 2004-33 Q&A number 10 addresses this concern.

Caution Required

As with many compliance issues in employee benefits, the facts and circumstances are critical to assessing compliance. And, the “right” answer may not be clear or apparent.

Counting Employees Not as Easy as 1…2…3

Most children can count to 10 in preschool. The average child can count to 200 at age six. But, employee benefit professionals know that counting – when counting employees — is anything but easy.

The reason that counting employees isn’t easy is that it depends why they’re being counted. Different laws at the federal and state level count employees in different ways. This is particularly true for laws that impact employee benefits.

The Affordable Care Act (ACA) requires that employers count employees to determine whether an employer is an “applicable large employer” or ALE.  An ALE is subject to the employer shared responsibility requirements of the law. First an employer needs to consider if the firm is part of a controlled group. Then, an employer must determine the number of full-time and full-time equivalent employees. Employers must make this determination of ALE status each year. The IRS guidance on determining ALE status can be found here.

COBRA, the federal employee continuation law requires a different method of counting employees. COBRA requires that employers count full-time and part-time employees. A part-time employee is counted as a fraction equal to the number of hours worked divided by the hours an employee must work to be considered full-time. A more detailed explanation of counting employees for COBRA purposes can be found in An Employer’s Guide to Group Health Continuation Coverage Under COBRA.

State continuation laws may count employees differently than COBRA.

Medicare Secondary Payer (MSP) provisions require yet another counting method. The MSP provision applies to group health plans of employers with 20 or more employees. Generally speaking, MSP looks to employees on the payroll. But, the technical aspects of counting employees are more involved as Section 10.3 of the Medicare Secondary Payer (MSP) Manual Chapter 2 reveals.

Form 5500 filing requirements for welfare plans add yet another counting complication. A welfare benefit plan that covered fewer than 100 participants as of the beginning of the plan year may be exempt from the filing requirements. The instructions for Form 5500 provide the details.

Other laws or regulations that may require different counting methods include:

  • Family and Medical Leave Act (FMLA)
  • Pregnancy Discrimination Act (PDA)
  • Age Discrimination Employment Act (ADEA)
  • PCORI fee
  • Form W-2 cost of health benefits requirement
  • Numerous other federal and state laws.

IRS Releases New Employer Reporting Forms

First the “bad news”…

Employers hoping that the IRS will relax ACA employer requirements may find the recent release of the draft 2017 employer reporting forms disheartening.

Many had hoped that President Trump’s Executive Order directing the Department of the Treasury to review tax regulations to reduce the tax regulatory burdens would include ACA’s employer reporting requirements and attendant penalties. However, the Treasury Department’s Notice 2017-38 regarding the review of regulations to identify regulatory burdens notably did not include any reference to ACA compliance.

Now the “good news” (sort of)…

The draft 2017 reporting forms have few changes. Sections related to expired transition relief have been deleted. Consistency in the forms from last year is good news for employers who have figured out how to complete the forms from the prior years. Changes may still be in the offing once instructions for the forms are published and the forms are finalized.

The draft forms are:

Form 1094-B

Form 1095-B

Form 1094-C

Form 1095-C

And, the “no news”…

There still haven’t been any signs that the IRS is sending notices to employers that they owe penalties under the “pay or play” provisions of the ACA. Some pundits believe that employers may see any demands for payments before the close of 2017.

In the meantime…

Employers should continue to comply with the requirements of the ACA.

Marketplace Broker Training Different for New and Returning Brokers

Brokers who pursue federal marketplace training this year will pursue a different path if they are new to the marketplace or renewing their registration.

A returning broker who can use the streamlined refresher training is one who was registered for the marketplace in 2017. To ensure eligibility for refresher training a broker should confirm that their NPN appears on the Agent and Broker FFM Registration Completion List for plan year 2017. This list is available here.

A new broker is one who is completing marketplace training and registration for the first time. A new broker is also one who may have participated in the marketplace in a prior plan year but did not complete registration and training for the 2017 plan year. New brokers are required to complete the full individual marketplace training for plan year 2018.

CMS has a presentation slide deck that new brokers should review in advance of attempting to register for the federal exchange. They will find this deck particularly helpful as it walks through creation of the CMS Enterprise Portal account and other required steps. The deck is available here.

The slide deck also contains instructions for brokers who wish to use an approved vendor for training. Vendors are required to offer five continuing education credits in federal marketplace states.

Marketplace training and registration is no longer available for the 2017 plan year. In fact, the system entered the “go-dark” period on July 21, 2017 in order to prepare for the launch of training for the 2018 plan year.

CMS has a resources page for agents and brokers. It can be accessed here.

Other resources that may be useful include:

New agent and broker guide to registration and training.

Returning agent and broker guide to registration and training.

Slide deck for returning agents and brokers.

How to Survive a Department of Labor Health Plan Audit

Ask anyone to choose a root canal or an IRS audit and the choice will be no surprise – root canal. Many employers would choose a root canal over a Department of Labor (DOL) health plan audit, too.

A DOL health plan audit can be triggered by a complaint or luck! In any event, notice of a DOL health plan audit calls for immediate attention from the employer.

The scope of documents that the DOL can review is broad, in large part due to the DOL’s responsibility to enforce a number of complex laws including:

  • PPACA.

In fact, the appendix to one DOL audit request listed 26 items for the employer to provide. Employers generally have 30 days to assemble the documentation requested for the audit.

If this information sounds like a really bad dream, the DOL has provided a lifeline. This lifeline is the self-compliance tool that is intended to help employers assess whether their plans are in compliance with the various laws. As importantly, assembling the documentation called for by the compliance tool would go a long way to making a health plan audit request more manageable.

Warning, this tool is comprehensive with 68 pages covering 93 questions!

Which brings back the idea of choices. Which is preferable, assembling the documents called for in the self audit over a period of weeks or months or scrambling when a DOL auditor is knocking on the door?