ICYMI: IRS Set to Calculate 2016 ACA Employer Penalties
In Spring 2018, the office of the Treasury Inspector General for Tax Administration (TIGTA) released the final report of an audit they conducted on the IRS’s implementation of key Affordable Care Act (ACA) provisions. Specifically, the audit evaluated the processes used by the IRS to ensure compliance with the Employer Shared Responsibility Provision – the “Pay or Play” side of the ACA’s Employer Mandate.
Per ACA regulations, to avoid compliance risk under Internal Revenue Code sections 4980H(a) and (b), an Applicable Large Employer (ALE) — and each ALE Member of an Aggregated ALE Group — must offer each full-time employee Minimum Essential Coverage (MEC) that provides Minimum Value (MV) and is affordable. If an ALE Member fails to offer appropriate coverage to an eligible employee and one or more eligible employees receives a Premium Tax Credit from the ACA Health Insurance Marketplace, then the employer may be assessed an Employer Shared Responsibility Payment (ESRP) per each employee who received a Premium Tax Credit through the ACA Health Insurance Marketplace (or Healthcare Exchange).
As a result of their audit, TIGTA reported a number of findings about the IRS’s process of assessing ESRPs. Of particular note:
- Of over 300,000 organizations the IRS identified as ALEs, nearly 50,000 were also identified as potentially liable for an ESRP.
- Since November 2017, the IRS has already sent more than 30,000 Letter 226J ESRP notices totaling roughly $4.37 billion to organizations identified as potentially liable ALEs.
- By their own calculations, TIGTA believes the IRS missed out on identifying 840 employers potentially subject to ESRPs for an additional $113 million due to incomplete and inaccurate data.
- The IRS now has the data to begin the analysis to determine and calculate the potential Employer Shared Responsibility Payment for Tax Year 2016.
- In Fiscal Year 2016, the IRS spent over $2.8 million on the maintenance of its data validation systems. TIGTA recommended further overhauling systems to improve accuracy and efficiency of data handling.
- While the IRS previously selected cases at random without regard to how much an employer would be liable for, they will now take the values of ALEs’ potential ESRPs into account when deciding which non-compliant organizations to audit.
What it Means for Applicable Large Employers
That’s a lot to take in – so what does TIGTA’s report really mean for ALEs? Reading between the lines, here is what we think you should know:
- More Letter 226J notices are on the way. The IRS has invested significant money in implementing and improving its ACA compliance enforcement processes, and they are banking on recuperating that money by assessing and collecting ESRPs. TIGTA found an additional 840 Tax Year 2015 ALEs not identified by the IRS, and the IRS already has the data it needs to begin assessing ESRPs for Tax Year 2016. Please do not expect the IRS to stop sending Letter 226J notices anytime soon.
- The IRS is better prepared to identify non-compliant ALEs than ever. Armed with constructive feedback from TIGTA, the IRS’s system for identifying non-compliant ALEs is more sophisticated than it has ever been, with the ability to prioritize those with the highest potential ERSP assessment value.
- The regulatory standard is higher for 2016 and future years. For Tax Year 2015, the IRS offered employers various types of transition relief, including a provision that allowed qualifying employers to avoid compliance risk with section 4980H(a) by offering MEC to only 70% of their full-time employees. For 2016 and future benefit plan years, that transition relief no longer applies, and ALEs must offer MEC to at least 95% of their full-time employees to avoid compliance risk under that same section.
- The ACA’s Employer Mandate is still the law of the land. Even though a number of Republicans in Washington, D.C. have made it their goal to repeal ACA, the Employer Mandate remains the law of the land. Its “Pay or Play” provisions are still very much in effect as the IRS continues to send out Letter 226J ESRP notices. H.R. 4616, the most recent repeal effort approved by the U.S. House of Representatives Committee on Ways and Means, appears unlikely to be passed into law.
- Now is not the time to risk noncompliance. Employers should not consider this a time to “wait and see” what happens next. Rather, now is the time to make sure reporting is properly completed for prior tax years and that processes are in place to be ACA-compliant for 2018 and beyond.
If your organization needs support in managing ACA reporting for prior, current or future years, contact the specialized ACA team at Equifax today.
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