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.

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.

Caution — Affordability Percentage Declining for 2018

Employers who are beginning assessing their plans for 2018 may need to revisit their contribution strategy if they are subject to the employer responsibility requirements of the ACA. Employers who are “applicable large employers” (ALEs) must ensure that coverage is “affordable” in order to avoid the ACA’s employer penalty.

Employer sponsored coverage was initially defined as an employee contribution for self-only coverage of no more than 9.5% of  the employee’s household income. The safe harbor established by the IRS affirmed that employers don’t know an employee’s household income; substituting the use of Form W-2 wages.

The affordability percentage is indexed and, as such, has gradually increased reaching 9.69% in 2017. However, 2018’s limit will decrease to 9.56%. As a result, even if an employer’s health plan premium doesn’t increase, the employer may have to up the employer’s contribution to keep coverage affordable. See the simplified example below:

Year       Affordability %   Annual W-2     Affordability      Max. Contribution

2017      9.69%                   $45,000               4360.50               $363.38

2018      9.56%                   $45,000               4302.00               $358.50

Employers who use the federal poverty level safe harbor will benefit from an increase in the federal poverty level to offset the affordability percentage decrease. The maximum monthly contribution using the FPL safe harbor will increase as shown below.

Federal Poverty Level Safe Harbor

Year                  Prior Year FPL   Affordability %   Maximum Monthly Contribution

2017                     $11,880               9.69%                   $95.93

2018                     $12,060               9.56%                   $96.08

With the daily news of Congressional deliberations to “repeal and replace” the ACA, some wonder if compliance with the ACA is still required. Unless and until legislation is passed by the House and Senate and signed by the President, compliance with the provisions of the ACA is recommended.

The IRS Revenue Procedure announcing the 2018 affordability measure is here.

ACA Employer Reporting Compliance Still Required

Mark Twain has been quoted as saying, “The rumors of my death have been greatly exaggerated.” One could use this same phrase to describe the penalties that employers face for noncompliance with the ACA’s employer reporting requirements.

President Trump’s first executive order signed on January 20th may be the “rumor” that ACA compliance is stayed. The order includes the following statement:

“Sec. 2.  To the maximum extent permitted by law, the Secretary of Health and Human Services (Secretary) and the heads of all other executive departments and agencies (agencies) with authorities and responsibilities under the Act shall exercise all authority and discretion available to them to waive, defer, grant exemptions from, or delay the implementation of any provision or requirement of the Act that would impose a fiscal burden on any State or a cost, fee, tax, penalty, or regulatory burden on individuals, families, healthcare providers, health insurers, patients, recipients of healthcare services, purchasers of health insurance, or makers of medical devices, products, or medications.”

Despite this order, the law still stands, as well as the pages of regulations published to implement the law. Whether the order can be used by any federal agency to waive penalties is unclear and could result in legal action.

The recent release of a TIGTA report may indicate that the IRS is still moving forward in its efforts to assess penalties on noncompliant employers. TIGTA is the Treasury Inspector General for Tax Administration. TIGTA issued a final report on April 7, 2017 titled: Affordable Care Act: Assessment of Efforts to Implement the Employer Shared Responsibility Provision. The report can be read here.

The report found that the IRS has had difficulty processing the ACA-related forms that employers have filed. Despite these delays some of the needed systems are expected to come online in May 2017.

Much of the 43 page report focuses on technical review and analysis of IRS processes. But, it is clear that progress is being made to implement the penalty assessment capabilities of the IRS that will identify noncompliant Applicable Large Employers (ALEs).

Employers are advised to continue to comply with the requirements of the ACA unless and until President Trump signs a law that ends them. Anything else amounts to “rumors.”

 

Keep on Complying!

One would have to be in a deep sleep to avoid the barrage of “news” regarding Congressional action to repeal the Affordable Care Act (ACA). But, all of the drama does not mean that anything has changed… yet.

Health insurance brokers have been fielding calls from clients asking if they still have to file forms 1094-C and 1095-C  which are due to the IRS by March 31, 2017.

The answer is, yes!

Other brokers and accountants are being asked if individuals should complete their tax returns due in April including the information regarding health coverage.

Once again, the answer is, yes!

Complying with the provisions of the Affordable Care Act will be required until legislation has passed both houses of Congress and been signed into law. Even after President Trump takes action, it’s likely that some provisions of the new law will be phased in. As a result, compliance with provisions of the Affordable Care Act (ACA) may be part of the compliance landscape for some time to come.

IRS Missive Seeks Out Non-Filing ALEs

It seems that some employers are receiving requests from the IRS asking where their reports are! These letters appear to be one of the first efforts by the IRS to enforce the employer responsibility requirements of the ACA.

Employers who have 50 or more full-time and full-time equivalent employees are required to file Forms 1094-C and 1095-C with the IRS. Last year was the first year that employers were required to file these forms addressing coverage provided in 2015.

The letter requires a response from the employer within 30 days from the date on the letter.

Employers are directed to check a box indicating their status for 2015. Choices include:

  • An assertion that filing had already occurred
  • Acknowledgement that the employer is an ALE and that the forms are included along with the response to the IRS letter
  • Acknowledgement that the employer is an ALE and the date that the employer will file the required forms
  • An assertion that the employer was not an ALE for calendar year 2015.

The letter closes with a reminder that noncompliance with reporting requirements could result in an assessment of penalties.

Employers that have not yet filed these information returns for calendar year 2015 should do so as soon as possible, if they receive a letter or not. It would also be wise to memorialize the reason for the delay and steps taken to come into compliance so that an employer can provide these facts in any effort to claim they made a “good faith compliance” effort.

Employers should take this enforcement effort as a gentle nudge to comply with the upcoming filing deadlines for the 2016 returns. Reports are due to be filed with the IRS on the following dates:

  • February 28, 2017 for paper forms
  • March 31, 2017 for electronical filing.

 

Preparing for 2017 – Checking Status and Filing Forms

Santa may be making a list and checking it twice, but employers have to check their ALE status and prepare to file forms!

Employers of all sizes need to take stock by calculating the number of full-time and full-time equivalent employees for the year 2016. If the average meets or exceeds 50, the employer will be an applicable large employer, or ALE, for 2017.

Determination of ALE status is done on a calendar year basis. It is not done based on an employer’s health plan renewal date. Importantly, employers that don’t currently offer a health plan must make this assessment!

The end of the year also has employers assembling the information necessary to complete Forms W-2 for employees. And, effective with the New Year, employers have this one filing deadline for both employee and agency copies of this form. These are due to be distributed by January 31, 2017. More details on this filing change can be found here.

One crunch employers faced has been eased by a recent IRS delay in the filing deadline for ACA’s 1095-C forms. Notice 2016-70 provides a 30 day extension to the due date for furnishing the 1095-B and 1095-C forms to individuals. These must be provided by March 2, 2017 rather than January 31, 2017.

This delay is particularly helpful for employers who use the W-2 safe harbor to determine whether health coverage was affordable for employees. Without a delay, employers would have to gather the wage data for the Form W-2 and apply that information to the 1095-C reporting regarding the safe harbor so that the two forms – W-2 and 1095-C could be issued to meet the January 31 deadline.

 

IRS Notice Delays ACA Employer Reporting to Individuals

In a surprise pre-Thanksgiving Day notice, the IRS has given employers some breathing space to complete and provide ACA’s 1095-C forms to employees. Notice 2016-70 provides the following:

It extends the “good faith compliance” transition relief from penalties when there is a good-faith effort to comply with information reporting requirements under sections 6055 and 6056

  • It provides an automatic extension of 30 days for the due date to provide forms 1095-B and 1095-C, but only for providing forms to individuals
  • Due dates for reporting to the IRS are not extended
  • It reminds taxpayers that they do not need to have their forms 1095-B and 1095-C to complete their tax return. They can obtain needed information from other sources.

Employers who had already filed for a 30 day extension to provide notices to employees will not receive a response from the IRS due to this automatic extension.

The notice also states that the good-faith compliance recognition applies only to incorrect or incomplete information. It does not apply for a failure to file a statement or return or a failure to furnish statements on a timely basis.