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.

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 Eases Filing Requirement for Individuals

In response to the Trump administration executive order that directed federal agencies to use discretion to reduce regulatory burdens, the IRS recently reversed course regarding individual tax returns and ACA compliance. The IRS had planned to reject individual tax returns if they were filed without information relating to whether the taxpayer had health coverage. In response to the executive order, these returns will be processed rather than rejected.

An individual shared responsibility payment for tax year 2016 is reported on line 61 of Form 1040, line 38 of Form 1040A, or line 11 of Form 1040EZ.

This doesn’t give individual filers who may not have had health coverage for all or part of 2016 a free pass. The IRS notice specifically notes that “legislative provisions of the ACA law are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe.”

The IRS reserves its right to follow-up with questions about a return and pursue amounts owed.

The announcement regarding this change in processing returns can be found here.

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

 

Contribution Strategy May Complicate Compliance

One of the recurring questions posed by NAHU members asks whether employers can vary the employer contribution to health coverage by employee class. For example, an employer may want to pay 75% of coverage for hourly workers and 50% for salaried workers. Or, an employer may want to offer 100% of coverage for workers who were with the company prior to January 1, 2017 but only 75% for those hired on or after January 1, 2017.

The short answer is “yes.” Employers have had a long history of varying contributions based on classes of employees.

The complication enters if the employer allows for pre-tax deductions of the employee portion of the premium. Cafeteria plans are subject to the Section 125 nondiscrimination rules, but there is a safe harbor exception available for premium only plans, commonly called POP plans. The safe harbor is available for POP plans if the employer allows all employees to elect the same salary reduction. These rules by the IRS indicate the following:

(f) Safe harbor test for premium-only-plans—(1) In general. A premium-only-plan (as defined in paragraph (a)(13) of this section) is deemed to satisfy the nondiscrimination rules in section 125(c) and this section for a plan year if, for that plan year, the plan satisfies the safe harbor percentage test for eligibility.

What this safe harbor means is that a plan is deemed to satisfy the Section 125 nondiscrimination rules because all employees can participate and can elect the same salary reductions for the same benefits.  There is no need to test utilization.

Here is an example from the IRS rules:

(2) Example. The following example illustrates the rules in paragraph (f) of this section:

Example. Premium-only-plan. (i) Employer F’s cafeteria plan is a premium-only-plan (as defined in paragraph (a)(13) of this section). The written cafeteria plan offers one employer-provided accident and health plan and offers all employees the election to salary reduce same amount or same percentage of the premium for self-only or family coverage. All key employees and all highly compensated employees elect salary reduction for the accident and health plan, but only 20 percent of nonhighly compensated employees elect the accident and health plan.

(ii) The premium-only-plan satisfies the nondiscrimination rules in section 125(b) and (c) and this section.

Keep in mind that this POP plan safe harbor is not available if the employer is offering other benefits beside just facilitating the payment of premiums. If the employer is offering a health FSA, the POP safe harbor  would not be applicable. Full Section 125 testing would be required.

The long answer, therefore, is that an employer wanting to create separate classes and vary contributions, eligibility or benefits will not be able to use this POP safe harbor. Full Section 125 testing will be required. A vendor or legal counsel can help the employer determine if the plan will be able to vary contributions, eligibility or benefits and still pass the Section 125 nondiscrimination testing.

 

 

ACA’s Individual Mandate — IRS Provides Update

With all of the talk about whether the Affordable Care Act will be repealed, replaced, delayed or some other description, one can forget about the fact that individuals have had tax consequences related to the ACA. A recent IRS letter that updated members of Congress about tax return data and the ACA provides an interesting window into the tax side of the ACA.

One of the provisions of the ACA provides advance payments of premium tax credits to help people reduce their out-of-pocket premium costs through the year. These are generally referred to as APTC (advanced premium tax credits).

APTC is calculated based on an individual or household’s expected income, family size and other factors. APTC is reconciled when taxes are filed at the end of the tax year. In some cases individuals will have received too much of a credit while in other cases they may qualify for more credit when their taxes are calculated.

Taxpayers who received APTC must reconcile the advanced payments using Form 8962. The IRS reported that forms 8962 processed as of December 15, 2016 showed:

  • The average premium tax credit for 5.3 million taxpayers was $3,620
    • 49% of these taxpayers claimed less than $2,000
    • 22% claimed $5,000 to $10,000
    • 5% claimed credits in excess of $10,000
  • About 2.4 million filers were due additional tax credits when they filed their taxes
    • The average additional amount received was about $670
    • 80% claimed less than $1,000
  • About 3.3 million taxpayers reported excess APTC meaning that they had to repay the excess
    • The average excess to be repaid was $870; totaling $2.9 billion
    • 50% of these filers owed a repayment of less than $500
    • 75% reported owing less than $1,000
  • There are statutory repayment caps that may apply which are based on household income
    • Statutory repayment affected approximately 921,000 taxpayers; about 28% of those claiming excess APTC
    • Approximately $874 million in excess APTC for tax year 2015 was above the statutory caps.

Individuals who have not enrolled in qualifying coverage for periods during the year may owe an individual responsibility payment – the individual mandate penalty. The individual responsibility payment for 2015 was 2% of income above the filing threshold or$325 per adult, whichever is greater.

Approximately 6.5 million taxpayers reported a total of $3.0 billion in individual shared responsibility payments. The average payment was around $470 with about 70% of payments $500 or less.

21st Century Cures Act Includes New HRA Provision for Small Employers

The 21st Century Cures Act passed the House and Senate on a bipartisan basis and  signed  by the President on December 13, 2016. This 1,000 page bill includes language that allows small employers to provide health reimbursement arrangement (HRA) funds for employees to purchase individual coverage.

Key provisions of Section 18001 titled “Exception from Group Health Plan Requirements for Qualified Small Employer Health Reimbursement Arrangements.

A “qualified small employer health reimbursement arrangement” is one that is funded solely by an eligible employer without salary reduction. It is provided on the same terms to all eligible employees.

Notwithstanding this requirement, the amount of the benefit may vary based on the price of a policy in the individual insurance market based on the age of the employee and/or family members and the number of family members eligible.

The arrangement provides payment or reimbursement of an eligible employee’s expenses for medical care under Section 213(d) incurred by the employee and eligible family members.

An eligible employer is one that is not an ALE under the definition in section 4980H of the ACA. Also, the employer must not offer a group health plan to any of its employees.

The maximum dollar limit per year is $4,950 for an individual employee and $10,000 for family members.

The maximum benefit may be prorated based on the months that an individual is covered by the arrangement. The annual maximum is to be adjusted for inflation using the Consumer Price Index (CPI) inflation rate.

The plan is subject to nondiscrimination requirements and may exclude employees defined in Section 105(h)(3)(B). The Act amends these requirements for the purposes of this provision by substituting 90 days for “3 years” in clause (i). As such, employees that may be excluded are:

  • Employees who have not completed 90 days of service
  • Employees who have not attained age 25
  • Part-time and seasonal employees
  • Employees who are members of a collective bargaining agreement
  • Employees who are nonresident aliens and who receive no earned income in the US.

Notice Required

 Employers are required to provide a notice 90 days before the beginning of the year or when an employee is first eligible for the plan. The notice must contain:

  • Statement of the amount of the eligible employee’s permitted benefit
  • Statement that information regarding the benefit must be provided by the employee to any health insurance exchange if applying for APTC
  • Statement that if the employee is not covered under MEC (minimum essential coverage) for any month that the employee may be subject to the individual mandate tax for the month and any reimbursements under the arrangement may be included in gross income.

Failure to provide the notice can result in a penalty of $50 per employee per incident not to exceed $2,500.

 Notices must be provided to years beginning after 12/31/16 or 90 days after the date of enactment of the Act.

HRA and Affordability

The HRA reimbursement is treated as affordable coverage for a month if the amount that would be paid by the employee as premium for self-only coverage under the second lowest cost silver plan offered in their respective individual health insurance market does not exceed the household affordability threshold. The applicable amount for a month is calculated based on 1/12 of the employee’s permitted benefit.

Effective Dates and Other Notes

The provisions of the section are effective for years beginning after 12/31/16. Coordination with the health insurance premium credit applies to taxable years beginning after 12/31/16.

Form W-2 reporting applies to calendar years beginning after 12/31/16.

 The HRA benefit is not subject to COBRA continuation requirements.

This small employer HRA is not considered a “group health plan” for some ERISA purposes.

There are some provisions for transitional relief which may benefit small employers that have had HRAs that were not in compliance with previous IRS guidance.

 

 

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.

 

Marketplace Appeals — The Results

At the risk of sounding like Nick Cannon on the television show  America’s Got Talent when they’re announcing performers advancing to the next round of competition, employers are beginning to see the results of appeals that they’ve filed when employees receive subsidies in the marketplace. Employers are finding some of these appeal decisions perplexing, especially when an appeal is denied. And, some employers fear that penalties will follow as a result of the lost appeal.

First, and of most importance, the marketplace appeal does not determine if an employer has to pay an employer shared responsibility penalty to the IRS. This point is made clear on both the appeals form and on the webpage that addresses employer appeals.

Second, an appeal that is denied may be due to the particular facts and circumstances of the employee and his/her family. In particular, even though an employer may have offered coverage that meets the minimum value and affordability safe harbors, the measure of affordability at the marketplace is based on household income. Household income may be quite different from an employee’s W-2 income. The marketplace’s decision regarding an employer’s appeal will not reveal personal and income information of the employee subject to the appeal.

The appeal decision letter explains that the marketplace will not consider whether an employee is a full-time employee or whether the employer employs 50 or more full-time employees and is subject to the employer shared responsibility payments. The reasoning cited in the letter is that “neither of these issues affect the employee’s eligibility for advance payments of the premium tax credit and cost-sharing reductions (if applicable).

Another employer found that the information which the employer sent to support their appeal did not go far enough. The employer submitted proof that the employer had offered coverage to the employee that met minimum value and was affordable. The hearing officer wanted proof of this offer in the form of the employee’s response to the offer. Employers that have been reluctant to require that employees sign waivers when they decline coverage may decide to require signed waivers or take other steps that can buttress the fact that an offer was made and rejected.

A review of several decision letters finds that decisions often cite “insufficient information” as the basis for the decision to reject the appeal. Employers may want to develop a checklist of materials that they will provide to ensure that appeals are not lost for want of more information.

Still other employers have received a letter while an appeal is under review that asks for more information to support the appeal. The types of information requested and documents that may contain the requisite information are shown below in a table copied from a letter asking for more information.

appeal-documents

While marketplace appeal decisions are not triggers for IRS penalties, a successful marketplace appeal may be helpful if the IRS does attempt to penalize an employer. The successful appeal would be another piece of information for an employer to include in the IRS appeal’s process. And, whether an appeal is successful at the marketplace level, or not, an employer will have already collected information that would be required to appeal an IRS penalty determination should one be received.