On April 7, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued an assessment of the readiness of the Internal Revenue Service (IRS) to enforce Employer Shared Responsibility provisions of the Affordable Care Act (ACA). The report reveals key insights regarding the timing of when the IRS could begin sending Employer Shared Responsibility Payment notices.
Background
The ACA established several obligations affecting Applicable Large Employers (ALEs) (generally, employers that employed 50 or more full-time and full-time equivalent employees in the prior calendar year). Among other things, ALEs are required to determine for each month which employees are full-time employees under ACA definitions; offer qualified health coverage within a specified time of employees becoming eligible; ensure that such coverage meets ACA affordability measures; and report to the IRS whether they offered each full-time employee (and any spouse and dependents) minimum essential coverage (MEC) under an eligible employer-sponsored plan. These annual reports detail, on a monthly basis, whether employees were offered coverage and whether such coverage met affordability measures, or if the employer was not liable for an Employer Shared Responsibility Payment – for example, if an employee was not employed during a month. For self-insured employers, IRS Forms 1095-C also identify all persons covered under the plan (e.g. spouses and dependents) and months of coverage.
This annual reporting is necessary to enable the IRS to calculate potential Employer Shared Responsibility Payments (ESRP). For 2016, ALEs that fail to offer health coverage to at least 95% of their full-time employees are liable for an ESRP of $2,160 times the total number of full-time employees, minus 30. ALEs that met the 95% threshold may still be liable for an ESRP of $3,240 for any employee who received subsidized health coverage through a Marketplace organization; if the employer coverage does not meet affordability standards. Assessment amounts are indexed annually. For 2017, the payment amounts are $2,260 and $3,390 per full-time employee, respectively.
What the TIGTA Report Reveals
Although employers have now concluded ACA reporting for 2015 and 2016, the IRS has not yet issued any proposed ESRP notices. The TIGTA report analyzed the IRS’s preparations to issue these notices, and explained that the IRS has not yet issued ESRP notices for a number of technical and other reasons. For example, despite electronic filing requirements that apply to submissions of 250 or more statements, a significant volume of paper reports was received, and the processing of paper reports was delayed. As of October 28, 2016, approximately 1.4 million paper Forms 1095-C had not yet been processed.
Additionally, certain validation criteria did not work as planned, resulting in incorrect error codes or no error codes when an error condition was actually present. Finally, certain systems that were needed to determine accurate Employer Shared Responsibility Payments were delayed. One such system was delayed until May 2017.
What This Means for Employers
The TIGTA report affirms that proposed IRS ESRP notices should be expected in the coming months for the 2015 reporting year. Consequently, large employers that are subject to the Employer Shared Responsibility provisions should prepare to analyze and respond to proposed IRS notices. Proposed ESRP notices for 2016 should also be expected later this year, although timing remains uncertain.
These proposed notices are expected to identify employees who received federally subsidized health coverage through a state Marketplace. Employers may need to respond to the IRS with details if they believe that a proposed assessment is incorrect – for example, if the individuals were not employed, were not full-time employees or received an offer of coverage which met affordability standards. If an employer does not respond to correct any inaccuracies, the IRS will deem the proposed amount to be final and subject to collection action.
Further, employers should continue necessary analysis and recordkeeping tasks, including:
- Determining for each month which employees are full-time employees under the Act
- Offering qualified health coverage as employees become eligible
- Periodic testing to ensure that such coverage meets ACA affordability measures
- Responding to Marketplace verification requests
- Verifying that the employer has SSNs/TINs and names of all dependents and spouses, or soliciting any missing names and SSNs/TINs
- Ensuring their readiness to furnish to employees and electronically file with the IRS Forms 1094C and 1095-C for 2017
Information Reporting Penalties May Also Apply
Significant IRS penalties may also apply for failure to file timely and correct information returns (under IRC Section 6721) or failure to furnish accurate statements to employees (and for self-insured employers, covered persons) by the applicable deadline (IRC Section 6722). The penalty for a failure under either IRC Section is currently $260 per statement; potentially $520 per statement if both sections apply, up to a maximum of $6,357,000 annually. These amounts are also indexed and may change annually. Penalties can apply for non-filing, late filing, filing in non-electronic form, or incorrect information.
IRS Notice 2016-4 confirmed that employers that did not comply with the reporting requirements remain subject to penalties under Code Sections 6722 or 6721, but encouraged employers to nonetheless furnish and file, because the IRS will take such furnishing and filing into consideration when determining whether to abate penalties for reasonable cause. The IRS will also take into account whether an employer made reasonable efforts to prepare to furnish and report the required information, such as gathering and transmitting the necessary data to an agent to prepare the data for submission, or testing its ability to transmit information to the IRS. In addition, the IRS will take into account the extent to which the employer is taking steps to ensure that it is able to comply with the reporting requirements for future years.
What Could Happen After 2019
If the ACA remains in place, things will continue as they are, with the employer mandate and the current reporting requirements, absent guidance from the Internal Revenue Service.
If the AHCA — or similar legislation — is enacted in its current state or amended, there will be changes, but employers will almost certainly still have a role to play. Under the AHCA, employers wouldn't be required to provide coverage to full-time employees or pay a penalty, but they would be involved in the process of determining whether individuals are eligible for the AHCA's premium tax credits.
The AHCA's age-based tax credits would only be available to people who don't have access to government or employer-sponsored coverage. Unlike ACA tax credits, eligibility for AHCA tax credits wouldn't depend on whether the available employer-sponsored coverage was affordable or provided minimum value. Although employers will likely find that maintaining robust, affordable coverage is the best option in terms of providing a competitive benefits package, this information would no longer need to be part of the reporting requirements after 2019.
As such, the House Ways and Means Committee explains that the AHCA would switch to a "simplified reporting of an offer of coverage on the W-2 by employers," which would replace the ACA's coverage reporting requirements once they're no longer necessary. The IRS would then be able to stop enforcing the ACA's reporting requirements, and employers would switch to reporting coverage offers on employees' W-2s. This could be less burdensome than the ACA's reporting requirements, but would still require employers to track coverage offers in order to ensure accurate data reporting. It is not clear whether reporting would be tracked monthly or if all employers (not just employers with 50 or more full-time and full-time equivalent employees as under the ACA) would need to report. The exact scope of this new reporting requirement would become clear through future regulations and guidance from the IRS.
Potential State-Level Variations
Although the ACA's premium tax credits and employer reporting requirements apply nationwide, states are increasingly considering their own approaches to health care reform. Minnesota has already implemented a state-based premium rebate, and Colorado lawmakers considered a state premium subsidy program during the 2017 legislative session.
The Patient Freedom Act (PFA), another ACA replacement bill introduced in 2017, would allow states flexibility in terms of keeping the ACA or switching to a state-based approach. If the PFA were enacted, employers would potentially be subject to reporting requirements that vary by state. In addition, amendments to the AHCA, in particular recent changes proposed by Representative Tom MacArthur (R-N.J.), also increase the role of states by giving states more flexibility to opt out of major ACA provisions as long as a high-risk pool is available for people with pre-existing conditions.
For the time being, the future of Health Care Reform isn't entirely clear. Employer responsibilities under the ACA might eventually be relaxed, but not entirely eliminated. They may also vary by state. Whether there are significant legislative changes to the ACA in the near future or down the line, employers should understand that reporting requirements will remain in place for the foreseeable future.
For the latest on how federal and state tax law changes may impact your business, visit the ADP Eye on Washington Web page located at www.adp.com/regulatorynews.
If you have any questions, please reach out to your Relationship Managers.