While the ACA lost some of its teeth this year as the individual mandate was removed via tax reform, employers who assume that enforcement against them is no longer an issue will need to reassess. Penalties for non-compliance still exist, and the IRS has every intention of enforcing them.
In the final days of 2018, during the federal government shutdown, the IRS began to issue a new set of penalties in its ongoing enforcement of the Affordable Care Act. Notices to assess penalties against employers that failed to file Forms 1094-C and 1095-C with the IRS or to furnish 1095-C forms to employees under IRC Sections 6721 and 6722 for the 2015 or 2016 tax years were issued. These penalties are separate from the penalties for failing to offer the required healthcare coverage.
What gives? Well, it appears the IRS is calculating these IRC 6721 and 6722 penalty assessments for certain employers based on the number of W-2s the employers filed. These IRC 6721/6722 penalty assessments are proposed using Letter 5005-A and Form 886-A.
This penalty assessment process is as follows:
- The IRS sends Letter 5699 to employers that did not file any ACA information returns (i.e., 1094-C/1095-C schedules) for a reporting year.
- The employer must respond to (a) confirm the name the employer used when filing its ACA information returns and identification information for tracking, (b) provide the ACA information returns or indicate when they will be submitted, or (c) explain why the employer is not an Applicable Large Employer (ALE), which is an employer with 50 or more full-time employees and full-time equivalent employees.
- If the employer fails to respond to Letter 5699 or to take action to address any filing issues, the result is a penalty assessment issued in Letter 5005-A/Form 886-A.
- The penalties for failing to file and furnish are indexed each tax year. For the 2018 tax year, penalties for failing to file and furnish can be as much as $540 per return. The penalties for the 2016 tax year can be as much as $520 per return.
Meanwhile, the IRS is continuing to issue penalties for noncompliance under IRC Section 4980H, which is the shared responsibility for employers regarding health coverage (essentially, the employer mandate). Under the ACA’s employer mandate, ALEs are required to offer minimum essential coverage to at least 95% of their full-time workforce (and their dependents), whereby such coverage meets minimum value and is affordable for the employee or be subject to IRS 4980H penalties. These penalties are included in Letter 226J, which the IRS is currently issuing for the 2016 tax year.
Employers are often shocked by the penalty itself as well as the amount -- into the millions for some employers.
Here’s what we suggest to our business clients:
- Know your risk of penalties. In reality, we’re these penalties only apply to firms with at least 50 employees that don’t offer affordable health insurance when an employee buys insurance on their own with a federal subsidy. In other words, you could very well be in the clear. If you’re uncertain, reach out to us, and we’ll be happy to help you assess your overall risk of penalties.
- If you’ve not been filing the required ACA returns annually with the IRS, call us immediately. It’s imperative that we get this information filed as soon as possible to avoid receiving an IRS penalty notice and minimize potential fines.
- If you do receive a penalty notice, take immediate note of the response date. It’s often very, very short.
Bottom line? Just because we haven’t heard a lot of noise around Obamacare lately doesn’t mean it’s gone away. Many aspects of the tax law persist despite the repeal of the individual mandate, and we’ll likely see less leniency on the part of the IRS to excuse employers for not filing ACA documentation going forward. Keep your business in compliance to avoid costly penalties.